OECD Taxing Wages 2026 Lands With Portugal Among the Eleven Economies Where Labour Tax Fell — Average-Wage Wedge Drops to 39.3% After a Second Round of IRS Reform

The OECD published its Taxing Wages 2026 report on Wednesday 22 April — its annual map of the labour-tax burden across the 38 member countries — and Portugal is, for a second year running, on the narrow list of countries where the wedge between what employers pay and what employees take home has fallen.

The labour tax wedge for the average single worker without children in Portugal stood at 39.3 per cent of total labour costs in 2025. That is a further decline of roughly 0.3 percentage points on the 39.6 per cent figure reported for 2024 — itself a 1.7-point drop from the 41.1 per cent recorded in 2023. Two years ago Portugal sat 12th highest on the OECD league. It is now 16th.

Only eleven of the 38 OECD economies saw their wedge fall in 2025. The OECD 38-country mean rose by about 0.1 points to 35.1 per cent; the 22-country EU average is 41.7 per cent. Portugal sits above the OECD line but comfortably below the EU line — a decade-long structural feature of the country's tax mix reconfirmed, rather than re-invented, by the 2025 numbers.

What the Tax Wedge Actually Measures

The OECD's headline indicator is the percentage of total labour cost — gross wage plus employer Social Security contributions — taken by personal income tax, employee Social Security contributions and employer Social Security contributions, net of any cash benefits returned to the household. It is the cleanest way to compare the cost of employing somebody across countries with wildly different income-tax and social-security architectures.

The 39.3 per cent headline for Portugal breaks down roughly as follows on 2025 numbers:

• Employee Social Security contributions: 8.9 per cent of total labour cost (the flat 11 per cent rate applied to gross wage, adjusted for the denominator).
• Personal income tax (IRS): around 13.4 per cent of total labour cost.
• Employer Social Security contributions: around 19.2 per cent of total labour cost (the 23.75 per cent on gross wage, adjusted for the denominator).
• Cash benefits: marginal for the single-worker case.

For a married couple with two children, the Portuguese wedge on an average wage falls by roughly twelve percentage points against the single-worker baseline — one of the sharpest family differentials in the OECD, driven by the coeficiente familiar embedded in the IRS and by the abono de família cash transfer. The EU average family differential is closer to seven points. This is the single most important number for expat families with Portuguese-resident children: on paper Portugal's labour tax burden is middle-of-pack, but for a typical two-earner family with kids it is already meaningfully below the EU mean.

Why Portugal Slipped Down the League

The 2023-to-2025 descent — 41.1 → 39.6 → 39.3 — tracks two consecutive rounds of IRS reform:

1. 2024 IRS reform. The October 2023 budget compressed the nine-bracket 2023 tax scale by lowering the marginal rates on brackets one through five. The lower effective-rate averages on middle incomes produced most of the 1.7-point fall in the 2024 wedge.
2. 2025 IRS reform. The 2025 budget carried a further, more modest round of cuts on brackets one through eight, plus the roll-out of the new ‹IRS Jovem› young-worker relief schedule, plus the extension of the IFICI regime. Combined, those reforms account for the 0.3-point further fall to 39.3 per cent in 2025.
3. No contemporaneous Social Security rate changes. The Taxa Social Única held at 34.75 per cent (11 per cent employee, 23.75 per cent employer) throughout the period. The wedge movement is therefore almost entirely an IRS-side story.

The 2026 budget, in discussion in Parliament, signals a more moderate further cut on IRS brackets. The OECD report flags that the labour wedge will likely stabilise near the 2025 level in 2026 rather than continuing to fall.

Where Portugal Sits in the OECD League

On 2025 OECD numbers the top and bottom of the wedge ranking for single-worker, average-wage, no-children look like this:

• Highest wedges: Belgium (around 52.7%), Germany (around 48.2%), France (around 46.8%), Austria (around 46.8%), Italy (around 45.1%).
• Lowest wedges: Colombia (around 0%), Chile (around 7.0%), New Zealand (around 21.0%), Mexico (around 21.7%), Israel (around 25.8%).

Largest increases in 2025: United Kingdom +2.45 points; Estonia +1.95 points; Germany +1.34 points. Largest decreases: Australia, Latvia and Italy all fell between 1.2 and 1.7 points — and Portugal's 0.3-point fall lands Portugal in that broader declining group.

For expats, the most useful comparator is probably the Iberian one: Spain's 2025 wedge for the same single-worker profile is roughly 39.6 per cent — essentially the same as Portugal's 39.3 per cent, reversing a decade in which Spain had the lower headline figure. Italy's remains near 45 per cent, France's near 47 per cent, Germany's above 48 per cent.

Why the Number Matters

The wedge is a two-way story. For employers, it is the cost of paying a Portuguese employee net of every compulsory levy. For workers, it is the slice of their own productive output that they keep. Cutting the wedge structurally is the single most direct way a country can improve the attractiveness of legal, formal employment relative to either informal work or emigration.

The 2025 decline is particularly relevant to three audiences:

• Relocated remote workers evaluating Portugal against Spain or Italy on take-home-pay metrics: Portugal has, for the first time in years, closed the wedge gap with Spain and widened it on France, Italy and Germany.
• Employers weighing a Portuguese hire vs. a UK hire: the UK's 2.45-point increase in 2025 against Portugal's 0.3-point decrease has reduced the post-Brexit 'London premium' on wedge grounds.
• Portuguese-based freelancers on recibos verdes: the OECD number captures salaried employees, not category-B self-employed. But the IRS cuts that produced the salaried-worker wedge fall also apply to the self-employed's IRS settlement in year N+1, provided they are on the simplified regime.

What the Government Will Not Say Out Loud

The 2024-2025 wedge fall is a budgetary achievement. It was paid for in part by stronger-than-expected tax receipts, in part by the buoyancy of a labour market running at effectively full employment, and in part by the government deliberately running a smaller headline surplus than the 0.7 per cent Eurostat figure registered for 2025. The Conselho das Finanças Públicas' April 2026 projection has the 2026 fiscal position swinging to a 0.1 per cent surplus — from the previously forecast 0.6 per cent deficit — but baking in roughly €1.2 billion of war-and-climate shock costs and flagging a return to deficits from 2027. In plain language: the path to a third year of wedge cuts in 2026 is tighter than the path to the first two was.

That caveat explains why the Ministry of Finance has carefully framed the OECD release as “consistent with the 2026 budget assumptions” rather than as a platform for new cuts. The Taxing Wages 2026 report is a victory lap on last year's reforms, not a blueprint for this year's.

What It Means for Expats

If you are choosing between contracting-of-employment in Portugal, Spain, France, Italy or Germany, the Portuguese 39.3 per cent wedge means your employer's labour cost for every €1,000 of take-home pay is somewhere in the neighbourhood of €1,650 — roughly the same as in Spain, meaningfully lower than in France, Italy or Germany, and well below any of the high-wedge EU core. If you are on a Portuguese employment contract already, your 2025 IRS settlement — the one you are filing now through the Portal das Finanças — should carry a marginally lower effective rate than your 2024 filing, on the back of the same reform that produced the OECD number. If you are a D8 remote worker on IFICI, the wedge is not your number at all — you're taxed under a separate regime and the national wedge is only indirectly relevant. And if you are running a Portuguese sociedade por quotas and paying yourself a gerente-remunerado salary, the wedge is exactly your number — and 2025 is a useful floor for modelling 2026 cash-flow.