The Salaried Middle

Essay · economics · September 2026

Portuguese employees in the middle of the pay scale pay social contributions on every euro they earn, VAT on most of what they spend, and an income tax whose rates climb fast at Portuguese salaries. None of this was designed to target them. It follows from where they sit: paid entirely in wages, taxed before they see the money, saving little, and earning just where the tax scale turns steep.

Reading time ≈ 11 min Contributions · income tax · VAT · what escapes

The question

Earned and Unearned said that between the poor, who pay little income tax, and the rich, who pay most of it, “sits the salaried middle, which pays social contributions from the first euro, VAT on most of what it earns and a steeply rising income tax”. This essay explains why: what each of the three taxes is, why it falls where it does, how Portugal compares, and what the middle gets back.

34.75%social contributions on every euro of wages, with no allowance and no ceiling

56%of an extra euro of labour cost taken at 1.67 times the average wage, 7th highest of 38 OECD countries

28%flat tax on interest and dividends, which pay no social contributions

44.7%of tax households that paid no income tax in 2024

The pay slip

Three taxes on one salary

Follow the cost of employing one person (Figure 1). For every euro an employer spends on a single employee, 19 cents go to Social Security from the employer and 9 more from the worker, at every level of pay. Income tax then takes nothing at the minimum wage, 7 cents at two-thirds of the average wage, 10 cents at the average wage of about €24,300, 17 cents at 1.67 times the average, about €40,500, and 26 cents at €100,000. What reaches the worker falls from 72 cents at the minimum wage to 61 at the average wage and 55 at 1.67 times the average.[1][2] VAT and other taxes on spending come on top, out of what is left.

Fig. 1 — Portugal: how the total cost of a single employee’s labour is split, at six levels of gross annual pay, 2025 rules, per cent. Single person, no dependants, the €250 credit for general family expenses and no other deductions. The employer’s contribution is counted as part of the cost of labour, as the OECD does. Data: author’s calculation from the IRS Code and the Contributions Code; it reproduces the OECD’s figure at the average wage.

Contributions

From the first euro, with no ceiling

Social contributions are not designed as a tax on ability to pay but as an insurance premium. Each euro of wages pays 23.75 per cent from the employer and 11 per cent from the worker, 34.75 per cent in all, and builds a right to a pension and to sickness and unemployment benefits.[2] Because every euro earns a right, there is no tax-free allowance at the bottom. And Portugal has no ceiling at the top: the rate is 11 per cent for the worker at every level. In Germany, by contrast, the worker’s contribution falls from 21.5 per cent of pay at the average wage to 15.7 per cent at 1.67 times the average, because contributions stop above a ceiling.[3]

The base is wages only. Interest, dividends, rents and capital gains pay no social contributions at all.[2] So the share of someone’s income that goes in contributions depends less on how much they earn than on how they earn it. For an employee, whose income is all wages, contributions on both sides take more than income tax at every salary up to well over €100,000.

Income tax

A scale that turns steep at Portuguese salaries

Income tax is progressive: the rate on each additional euro rises with income. Two measures matter. The average rate is the share of the whole income taken; the marginal rate is the share of the next euro. For a single employee in 2025, counting contributions on both sides, the average rate on the cost of labour rises smoothly from 28 per cent at the minimum wage to 39 per cent at the average wage and 45 per cent at 1.67 times the average. The marginal rate rises in steps: 48 per cent at the average wage, 53 to 56 per cent from about €27,000, and 59 to 60 per cent from about €47,000 (Figure 2).[1]

Fig. 2 — Portugal: average and marginal tax wedge (employer and employee contributions plus income tax, as a share of the total cost of labour) by gross annual pay, single employee, 2025 rules. Dotted lines mark the minimum wage, the average wage and 1.67 times the average. Data: author’s calculation (see Figure 1).

The steps come from the brackets of the income tax scale, and the brackets are set in euros that fit Portuguese pay, which is low. In 2025 the 34.9 per cent rate applied from about €33,000 of gross salary, 1.35 times the average wage; 43.1 per cent from about €47,000; and 44.6 per cent from about €50,500. The top rate of 48 per cent started at 3.45 times the average wage, down from 5.08 times in 2013, because the brackets were frozen for years while wages rose.[4] Many experienced professionals earn in this range, where each extra euro is taxed at rates that in Germany, measured against its own much higher average wage, are reached only at the top. Compared across the OECD, Portugal’s marginal wedge at 1.67 times the average wage, 56.3 per cent, is the seventh highest of 38 countries, above Spain, Germany and the EU average (Figure 3). At the average wage, by contrast, it is below the EU average, 47.8 against 51.0 per cent.[3]

Fig. 3 — Marginal tax wedge for a single worker earning 1.67 times the national average wage, selected OECD countries and averages, 2025, per cent of labour cost. Data: OECD, Taxing Wages 2026.

The steepest step of all, though, is not in the middle. Just above the minimum wage, Portugal withdraws a tax-free minimum, the mínimo de existência, which guarantees that no one is left with less than about €12,180 a year after income tax. For each euro earned above it, about €2.60 of the protection is withdrawn, so between about €12,200 and €13,900 of gross pay the marginal wedge reaches 64 per cent, the same as at €100,000.[1][5] A worker moving up from the minimum wage keeps little more than a third of the extra cost of employing them.

Frozen brackets also raise tax without a vote. When wages rise with inflation and the thresholds do not, more of each salary is taxed at higher rates. In 2022, with inflation at 7.8 per cent, leaving the brackets unchanged raised about €523 million, a quarter of that year’s growth in income-tax revenue.[6] Since 2025 the law updates the brackets each year by inflation and productivity, which should limit this in future.[4]

The base

Where the income tax comes from

Why does the State lean on this group? Because the income tax base is narrow at both ends. In 2024, 44.7 per cent of tax households paid no income tax at all: their incomes are too low. At the other end, households declaring €50,000 or more were 9.7 per cent of the total and already paid 67 per cent of the tax. Between them, households declaring €13,500 to €50,000 were 47 per cent of the total and paid 31 per cent.[7]

Fig. 4 — Portugal: share of all personal income tax assessed, by the gross income declared by the tax household, 2009, 2013, 2019 and 2024. The bands are fixed in nominal euros and were never indexed, so households drift into higher bands as pay rises; the 2024 figures rank households on a broader income concept than earlier years. Data: Autoridade Tributária, IRS statistics.

When the State needed money fast, the middle is where it went (Figure 4). In 2013, the year of what the finance minister called an “enormous increase in taxes”, income tax assessed rose by 28 per cent while declared income rose by 0.2 per cent, and the share paid by households on €13,500 to €50,000 jumped from 36 per cent in 2009 to 47 per cent.[7] The reason is practical as much as political. Salaries are known to the tax authority, taxed monthly at source by the employer and hard to reclassify; the income of the self-employed, of company owners and of the rich is more varied and more mobile. A government that needs revenue quickly takes it from the income it can see.

Since then the shares have moved back towards the top, partly because the tax was cut for lower and middle incomes in 2024 and partly because many more households now declare more than €50,000 in nominal euros, 9.7 per cent against 5.8 in 2019, on a slightly different count.

VAT

Tax on what is spent

VAT is charged on spending, so what it takes from a household’s income depends on how much of that income is spent. The Banco de Portugal estimates that in 2024 VAT took 17.3 per cent of the disposable income of the poorest fifth of households, about 11 per cent in the middle fifth and 8.4 per cent in the richest (Figure 5). Measured against spending instead, the burden is almost flat, 12 to 14 per cent, slightly higher for the rich, who buy more goods at the standard rate of 23 per cent. The difference between the two measures is saving: the poor spend all they have, the rich save much of theirs.[8]

Fig. 5 — Portugal: VAT paid as a share of disposable income and as a share of spending, by fifth of the distribution of equivalised disposable income, 2024 VAT rules. Values for the second to fourth fifths are read from the source’s chart. Data: Banco de Portugal, Boletim Económico, June 2025.

So VAT is not a tax aimed at the middle; it is heaviest at the bottom. The middle pays about the average, 10 to 11 per cent of its income, because it saves only a little. Overall, VAT undoes about a third of the redistribution that income tax achieves.[8]

What escapes

The same income, taxed differently

The weight on salaries is clearest when the same sum arrives in other forms (Figure 6). If €50,000 is what an employer spends on a salary, contributions and income tax take about 45 per cent of it. If the same €50,000 is a company’s profit paid out as a dividend, corporate tax and a municipal surcharge and then 28 per cent on the dividend take about 43 per cent. Received as interest, or counted only at the shareholder, it pays a flat 28 per cent, with no contributions.[2][9] Inherited from a parent, it pays nothing: Portugal abolished inheritance tax in 2004, and spouses, children and parents are exempt from the stamp duty that replaced it.[10]

Fig. 6 — Portugal: total tax on €50,000 depending on how it is received, 2025. Salary: €50,000 is the employer’s total cost; single employee. Company profit: corporate tax of 20 per cent plus 1.5 per cent municipal surcharge, then 28 per cent on the dividend. Interest or dividends: the 28 per cent flat rate at the shareholder level only. Inheritance: stamp duty exemption for spouses, children and parents. Data: author’s calculation from the IRS, IRC and Stamp Duty Codes.

The flat 28 per cent is not always an advantage: a person with little other income can choose to have dividends added to their income and taxed on the scale, and may pay less that way. But for anyone with a salary in the upper-middle brackets, a euro of capital income is taxed more lightly than a euro of work, and pays nothing towards Social Security.

What comes back

Paying in, and getting back

Three qualifications keep the picture honest. First, the “middle class” of Portuguese political debate, salaried people on €30,000 to €50,000, is statistically near the top: the median tax household declares between €10,000 and €13,500 a year.[7] The people who feel squeezed are mostly the upper-middle.

Second, contributions are not only a tax. The 34.75 per cent buys a pension that rises with the wages it was paid on, and cover for sickness, parenthood and unemployment. Much of it comes back, later, to the same people.

Third, the State spends as well as taxes. Counting all taxes, transfers and public spending, including health care and schools, the World Inequality Database finds that the middle 40 per cent of Portuguese adults roughly break even, gaining about 1 per cent over their pre-tax income, while the poorer half gains 29 per cent and the richest tenth loses 18.[11] The middle does not subsidise the State so much as pay for its own services, as The State’s Ledger showed in detail. Nor did the austerity of 2009 to 2012 fall hardest on the middle: taken together, those measures cost the poorest and the richest a larger share of their income.[12]

The balance

A position, not a target

The salaried middle carries a heavy load not because any law singles it out but because of where it sits. Its income is all wages, and wages carry contributions from the first euro with no ceiling, while capital income carries none. It is paid through the employer, so its tax is collected before it is seen. It spends most of what it earns, so VAT takes a full share. And it earns just where a tax scale drawn in Portuguese euros turns steep, a scale that was frozen for years while wages rose. When revenue was needed, it was the largest base the State could reach.

The ways to lighten the load are known, and each has a cost. Indexing the brackets, now in law, stops the silent rise. Widening the base, by taxing capital income, large inheritances or property more like work, would let the rates on salaries fall, but meets the objection that capital moves. A ceiling on contributions would help the upper-middle but weaken the link between contributions and pensions, or cost the pension system revenue. And the sharpest rate on a salary, just above the minimum wage, is a design flaw that could be smoothed without favouring anyone. Which of these to choose is a political decision; the arithmetic only shows where the weight now falls.

On method and tools

This piece was written collaboratively with Claude Opus 5.5 (Anthropic): human specification, editorial direction and critical review; machine data research, analysis and drafting. The figures and derived numbers are computed by scripts/middle.py. The salary calculations apply the 2025 rules of the IRS Code (rates as set by Lei 55-A/2025, the specific deduction, the mínimo de existência and the solidarity surcharge) and the Contributions Code to a single employee with no dependants, with the €250 general-expenses credit and no other deductions, IRS Jovem or regional rates; the annual liquidation is modelled, not monthly withholding. Without the credit, the calculation reproduces the OECD’s income tax at the average wage to the cent. Employer contributions are counted as borne by the worker, the OECD convention, which is standard in the long run but disputed in the short run. The IRS shares by band use the tax authority’s statistics, whose bands are nominal and whose method changed for 2022 onwards. VAT by quintile is the Banco de Portugal’s estimate using 2015 spending patterns. Results are in docs/middle-results.json and the figures in docs/middle-figures.html.

The cover photograph is Amoreiras Tower detail, Lisbon, Portugal by Jules Verne Times Two; CC BY-SA 4.0, via Wikimedia Commons, cropped.

Authored by: Luis Matos Ferreira — Physicist, Developer, Writer

Related essays on this blog

1. Earned and Unearned — how work and ownership share income, and how differently each is taxed.
2. The State’s Ledger — who pays the State’s revenue and who receives its spending.
3. Who Gets the Profits — where the income that is not wages goes.
4. Work, Time and Money — the reading guide to the whole series.
5. What We Found — the conclusions of the whole series in ten points.

Sources

1. Author’s calculation for a single employee, 2025 rules: Código do IRS, arts. 25, 68 (as amended by Lei 55-A/2025), 68-A, 70 and 78-B; IAS 2025 €522.50; minimum wage €870 a month (14 payments).
2. Código dos Regimes Contributivos do Sistema Previdencial de Segurança Social (Lei 110/2009), art. 53; Código do IRS, arts. 71 and 72.
3. OECD, Taxing Wages 2026, database: average and marginal tax wedges and employees’ contribution rates, single person without children at 67, 100 and 167 per cent of the average wage, 2025.
4. Código do IRS, art. 68 (schedules 2013–2026) and art. 68-B (automatic indexation, Lei 34/2024); OECD average wages; author’s ratios of thresholds to the average wage.
5. Código do IRS, art. 70 (mínimo de existência), as in force for 2025.
6. Conselho das Finanças Públicas, Evolução Orçamental das Administrações Públicas em 2022, Relatório 05/2023, Caixa 2, pp. 27–28.
7. Autoridade Tributária e Aduaneira, Estatísticas do IRS: Modelo 3 returns by gross income band, 2009–2024, and Notas prévias IRS 2011–2013, pp. 8–10.
8. L. Wemans and S. Sazedj, “O IVA em Portugal e a sua incidência na distribuição de rendimento”, Banco de Portugal, Boletim Económico, June 2025, pp. 55–62, Gráficos 11–13.
9. Código do IRC, art. 87 (20 per cent in 2025); Lei 73/2013, art. 18 (municipal surcharge up to 1.5 per cent); author’s calculation.
10. Código do Imposto do Selo, art. 6, and item 1.2 of the general table (10 per cent on gratuitous transfers).
11. World Inequality Database, Portugal, pre-tax and post-tax national income by group, 2022 (structure estimated for 2019), as used in Earned and Unearned.
12. Avram et al., “The distributional effects of fiscal consolidation in nine EU countries”, EUROMOD working paper EM2/13, Figure 2, p. 13.