Employment tax and PAYE in Portugal, Non Habitual Residence & more (2022)

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Whilst every care is taken as to the accuracy of the information in these videos, the information provided is based on the understanding of the rules at the time, and rules can change with little or no notice.

Whilst I cover a wide range of issues on the channel, in my professional role I specialise in tax efficient investments, UK and overseas pensions, estate planning, and wealth management for expatriates based in Portugal. Unfortunately, I do not offer visa or tax return services, nor can I assist US nationals.

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You have to think about income tax AND social security contributions aspects.

My assumption in this video is that you are watching in advance of your move to Portugal and therefore will be applying for the Non Habitual Residence (NHR) program.

1. TAX (Self-employment and employment)

Income tax
From a tax point of view, it is neutral between self-employment and employment

Myths

• Many think that because they’re paid from the UK, US etc., then income is tax free in Portugal.
• Also they’ve read that foreign source income under NHR is tax free which adds to their confusion.

Actual position

• The actual position is that employment and self-employment tax is generally determined by where you perform work.
• So a client can work for a UK company but if their work is performed solely in Portugal, they are taxed in Portugal.
• So what is the actual position about foreign source income? If you read about foreign sourced income being tax free, that is true but the key condition for being tax free in Portugal is that it MUST BE TAXED or POSSIBLY be taxed in the source country, but most tax treaties give the taxing right to the country of residence (Portugal) rather than source state.

Self-employed simplified reporting regime

Where self-employment and employment can differ, is how much income is reported.

With self employment, you can report your income in two ways:

• Accounting basis – this is the standard basis of accounting that is common in the UK, whereby you take your annual income, deduct any allowable expenses, and pay tax on the difference
• Simplified reporting – in this way, you declare set percentage of you income based on occupations classification.
o Only available if your income is less than €200k. pa

Rates

The default position is that you pay tax at scale rates.

If qualify as a “high valued activity” then you can qualify for a 20% flat rate of income tax, which is attractive compared with the standard scale rates of up to 48%.

2. Social security

The main principles are that a person is a member of the national insurance scheme in the country he or she works, and that one should only be a member of one national insurance scheme in one country at a time.

This means that a foreign worker who takes up work in Portugal should, as a rule, be regarded as a member of the Portugal social security system, and no longer be a member of the home country's national insurance scheme.

Employers must also pay employer's contribution on the employee's salary.

An exception is that a person posted from his or her employer to work temporarily in another EEA country can retain the membership in the home country's national insurance scheme for up to 24 months.

And even though the UK is not in the EU anymore, you can still use this exemption.

Unlike income tax, there IS a distinction between self-employment and employment here in terms of rates applicable.

Forming a company

• Dividends from companies are tax free under NHR if they may be taxed in the country from which they originate e.g. UK companies
• You will continue to pay corporation tax in country where company is based
• There are no social security contributions appliable on dividends

NHR List of High Added Value Activities

As per Ministerial Order 230/2019, in force as from 1 January 2020

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