Finance Minister Details Multi-Year IRS Cuts and 6% VAT on New Housing
The Portuguese government has laid out an ambitious fiscal policy agenda, confirming its intention to significantly reduce the personal income tax (IRS) burden over the next four years and providing critical details on the implementation of a reduced VAT rate for housing construction. During a parliamentary hearing on the State Budget for 2026, Finance Minister Joaquim Miranda Sarmento announced that the government will proceed with a €2 billion reduction in IRS by the end of the current legislature, while also managing expectations for the impact of the new 6% VAT on construction.
The policy objectives are clear: to increase household disposable income and stimulate the supply of new homes. Minister Sarmento stated that the government's strategy is to provide financial relief to families and enhance Portugal's competitiveness. This will be achieved through a consistent, phased reduction of the IRS, amounting to approximately €500 million annually through 2029. For the year 2026, the budget proposes a 3.51% adjustment of the income tax brackets and a direct cut of three percentage points for taxpayers in the second to fifth income tiers. This measure is expected to benefit a broad swath of the population, including the expatriate community, for whom the tax regime is a significant consideration. For a deeper dive into the financial aspects of living in Portugal, exploring resources on financial concerns is advisable.
A central piece of the government's housing strategy, the reduction of VAT on new construction from 23% to 6%, was also detailed. The minister explained that this reduced rate will apply to new housing projects for which permits are submitted after the law comes into force, which is expected in 2026. He emphasized, however, that the policy is a "medium/long-term" solution. Due to the time required for municipal approvals and the subsequent construction phase, the most significant impact on the housing market is not anticipated until 2027. This timeline is crucial for developers and investors planning new projects.
The government's rationale is that lowering the tax on construction will directly reduce development costs, thereby incentivizing the creation of more housing units and, eventually, helping to moderate property prices. This policy is a direct response to the housing affordability crisis that has affected much of the country, especially urban centers like Lisbon. By making construction more financially viable, the government hopes to attract more investment into the residential sector. Investors looking to understand the tax implications of such developments should consult with specialized professionals, such as accountants focusing on property tax.
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In the same parliamentary session, Minister Sarmento pushed back against calls from the opposition Socialist Party for a permanent, across-the-board increase in pensions. He argued that such a move would be fiscally irresponsible and could jeopardize the long-term health of the Social Security system. The minister clarified that the current Social Security surplus is smaller than claimed and is needed to cover existing commitments. The government's preferred approach is to provide one-off support payments to the most vulnerable pensioners when there is available budgetary margin, rather than creating a structural increase in expenditure.
This fiscal stance highlights the government's focus on maintaining balanced public accounts and a robust reduction in public debt. The minister stressed that all tax reduction measures are being implemented within a framework of fiscal prudence. The debate underscored the differing economic philosophies between the current administration and the opposition, with the government prioritizing tax cuts to stimulate economic activity while the opposition favors more direct social spending.
The implementation of these policies will be closely watched by both Portuguese citizens and foreign investors. The planned IRS reductions offer a clear benefit for those living and working in Portugal, while the VAT cut on construction presents a significant opportunity for the real estate development industry. The success of these measures will be judged by their ability to foster economic growth and alleviate the pressures in the housing market. For ongoing analysis of these and other government policies, our blog on regulatory and legal frameworks offers valuable insights.
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