The new withholding tax model for employees and pensioners, which will come into effect on Saturday 1 July, should lead to an increase in net wages of up to 5%, according to simulations by the Ministry of Finance.
“This new model is to ensure that two fundamental objectives are met: to ensure that an increase in gross income always corresponds to an increase in net income at the end of the month; through the issuance of the IRS Model 3 declaration,” says the guardianship, led by Fernando Medina, in the communiqué released this Friday.
The Finance note presents three simulations for singles without dependents, singles with one family member and married, two holders, with one family member.
In a household of only one person, the monthly net wages, compared to the first semester, vary between 1% and 2% or between EUR 12.48 and EUR 33.78 for gross wages above EUR 762, the exemption ceiling, and up to EUR 3400 . For example, a single employee who earns EUR 850 gross per month will already experience an increase of EUR 17.39 after the IRS rebates, which corresponds to an increase of 2%.
A single person with a dependent can see his net salary increase by 2% to 5% or between 21.91 euros and 65 euros for the same salary scale. Let’s take a look at this simulation: an employee with a dependent child with a salary of EUR 850 gross per month will earn an additional EUR 36.72 per month, which corresponds to a net salary increase of 5%.
In the case of a couple with a dependent, the net profit is limited to between 1% and 3% or between 10.52 euros and 48.40 euros. The simulation for a gross salary of EUR 850 per month shows an increase, already after the IRS reductions, of EUR 21.82 or 3% compared to the June net salary.
“In practice, this is an approximation of the monthly withholding amount to the IRS amount that will actually be paid each year,” the Treasury Department clarifies, concluding that “for most taxpayers, the application of the tables will result in an increase in the monthly net income compared to the amount they earned in the first half of the year”.
For example, employees and retirees can now “own their own income, instead of waiting for reimbursement – which only happens in the following year, when less adjustment is needed,” he emphasizes. That is, with the approximate amount of deductions from the actual tax due, employees should expect a smaller refund next year.
Single people with a disabled child are penalized
But not all employees will benefit from withholding tax exemptions, which would result in an increase in take-home pay, as Dinheiro Vivo has already reported. For example, single people with a child, with a degree of disability equal to or greater than 60%, who earn more than 1118 euros gross per month, will deduct more, which translates into a lower net salary.
The warning was given by Deco Proteste and later confirmed by Dinheiro Vivo’s accounts for different income groups. If these tables are maintained, the wage loss can vary between EUR 1 per month for gross monthly wages of EUR 1118 and EUR 161 for gross wages of EUR 8000, compared to the applicable retention regime. If we calculate the deductions for, say, a salary of 1700 euros, then the fine is 63 euros per month.
However, Finance Minister Fernando Medina said at a hearing in parliament last Wednesday that the government will “analyze the issue” of single workers with disabled children who will lose wages with the IRS’s new tables, which take effect on April 1 July. It is the first time that the government is considering this issue. When Dinheiro Vivo first reported this fine, it also questioned the Ministry of Finance, but received no response.
Now, at that hearing, Fernando Medina admitted that he had corrected the tables: “I will analyze the case and if a correction needs to be made, we will do it”. And said no more.
Dinheiro Vivo again wondered if it will correct the tables effectively and how, but so far it has not received an answer.
A disabled child is worth less
The weight that Finance assigns to the disabled child is one of the main justifications for the deteriorating retention rate. Until June, a dependent with a disability rate equal to or greater than 60% was equivalent to five children for tax purposes, significantly easing the reductions. As of the second semester, the same descendant will be worth only 3.5 children, according to Dinheiro Vivo accounts. This information is not available on the Finance Portal, but in messages from the Ministry of Finance, so it is not easy for the general public to decipher.
For example, order no. º 14043-A/2022 of December 5, 2022 until June stipulates that “every dependent person with a degree of permanent disability equal to or greater than 60%, for the purposes of withholding tax, is equal to five persons at least dependent non-disabled”. This standard, which, according to the same diploma, “enters into force until June 30, 2023”, has as a direct consequence the exemption from withholding tax on earned income, because the more children an employee has, the wider the scope of the exemption and minors are the reductions.
The rules change in the second half. Not only do the tables no longer work according to percentage rates and a formula based on nominal values is now applied, but disabled children are also becoming less important in the phasing out of reductions in wages. 14043-B/2022 of December 5, 2022, “for each dependent with a degree of permanent disability equal to or greater than 60%, the amount of 84.82 euros is added to the portion to be deducted” . The same legal text contains an amendment that “will come into force from 1 July 2023”. This amount, added to the EUR 34.29 deductible per child, amounts to EUR 119.11, which is EUR 52.35 less than the EUR 171.45 to be deducted from the employee’s income if the child in question is worth five persons without disabilities. That is, the disabled dependent is now worth 30.5% less or 1,525 fewer children, which corresponds to 3.5 healthy offspring.
This devaluation will increase the withholding tax. With the current tables, employees who earn, for example, 1700 euros gross, deduct 110 euros per month. From the second semester, they deduct 173 euros, plus 63 euros per month.
Losses were verified in all simulations for income equal to or higher than EUR 1118. However, there is an exception. Anyone who receives 1800 euros gross per month has a net profit of 2 euros. On the other hand, for salaries equal to or below EUR 1117, there was no exemption from withholding compared to the current tables, as these income brackets are exempt.
Remember that IRS rebates are advances that employees pay to the state in respect of tax due in the following year. Greater retention does not mean an increase in the tax burden. That is, those who give a higher discount now can get a larger amount back later. Employees who withhold less may receive or even have to pay less tax.
Source: DN
