What they are

The holiday allowance and the Christmas allowance (often called the 13th month) are mandatory cash entitlements due to every employee, set out in the Labour Code (articles 264 and 263 respectively). They cannot be waived by agreement between employer and employee.

Each allowance equals one month of base pay, plus seniority payments where applicable. Base pay excludes the meal allowance and occasional variable bonuses. For most employees, each allowance therefore matches monthly gross salary.

Reference figures for 2026: social support index (IAS) = EUR 537.13, national minimum wage = EUR 920. These set the thresholds used in calculations and exemptions (IRS Jovem, withholding brackets and so on). The annual tax due follows the Portugal tax brackets 2026.

When they are paid

Paying the Christmas allowance late, after 15 December without justification, is a labour offence carrying a fine and default interest payable to the employee. Some employers, by policy or under an applicable collective agreement, pay the allowances in twelfths (1/12 each month). That is permitted where it is agreed in writing.

Calculating the holiday allowance

For an employee who worked the full calendar year, the holiday allowance equals one month of base pay.

Where the employee joined during the year (or it is the first year of the contract), the pro-rata rule in the Labour Code applies:

Holiday allowance = (base pay x complete months worked in the reference year) / 12

In the year of hiring, an employee accrues 2 working days of holiday for each complete month worked, with the allowance in proportion. Holiday and the holiday allowance can only be taken or paid from 1 January of the year following the year of hiring, unless agreed otherwise in advance.

Calculating the Christmas allowance

For an employee who worked the full calendar year, the Christmas allowance equals one month of base pay, paid by 15 December.

Where employment starts or ends during the year:

Christmas allowance = (base pay x complete months worked in 2026) / 12

Worked examples on base pay of EUR 1,200:

Where employment ends before 15 December, the pro-rata Christmas allowance is paid in the final settlement.

Income tax and social security

Holiday and Christmas allowances are fully employment income (category A). There is no exemption, and they are subject to:

• Income tax, withheld separately: under article 99-C(5) of the Personal Income Tax Code, each allowance is taxed in isolation from the salary of the month it is paid in, applying the withholding table for the allowance itself. Withholding it separately stops the combined salary-plus-allowance figure pushing the employee into a higher withholding bracket that month.
• Social security: 11% employee plus 23.75% employer, on the gross allowance.

An illustrative table across pay levels (allowance equal to base pay, approximate figures — the tax depends on family circumstances):

The tax figures are estimates. The 2026 withholding tables published by the tax authority set the exact rate according to family circumstances (single, married, dependants) and type of income.

IRS Jovem 2026 and the effect on allowances

The IRS Jovem regime (article 12-B of the Personal Income Tax Code, as enacted by Law 45-A/2024) gives a partial, tapering income tax exemption to taxpayers aged up to 35 who are not treated as dependants, on category A and B income, for 10 years, claimed by election on the return. No completed cycle of studies is required: that condition existed in the earlier version of the regime and was removed by Law 45-A/2024.

In 2026 the annual exempt ceiling is 55 × the social support index = EUR 29,542.15. The ceiling applies to total category A income for the year, including:

• Monthly salaries (12 or 14)
• The holiday allowance
• The Christmas allowance
• Other employment payments (gratuities, bonuses)

The exemption tapers across the 10 years:

A worked example: someone in year 1 of the regime on base pay of EUR 1,800 × 14 months (12 monthly payments plus the holiday and Christmas allowances) earns EUR 25,200 a year. That is below the EUR 29,542.15 ceiling, so the full year-1 exemption applies (100%). In the month the Christmas allowance is paid, the separate withholding on it is zero, up to the ceiling. The effect shows up mainly in net pay in November and December.

Where annual income exceeds EUR 29,542.15, the excess is taxed at the ordinary rates in article 68 of the Code, even for someone within IRS Jovem. High salaries plus allowances can therefore cross the ceiling and lose the exemption on the excess.

For more on the regime and how to claim it: IRS Jovem 2026 — full guide →.

Long-term sickness and parental leave

During sick leave or parental leave, the employee receives no salary from the employer but a benefit paid by social security. This affects how the allowances are calculated:

• Sickness up to 30 days: does not affect the count of months for the Christmas allowance, which stays whole.
• Long-term sickness (over 30 days): days of sickness do not count towards service for the Christmas allowance calculation, so there may be a pro-rata reduction. Check the applicable collective agreement — some maintain payment in full.
• Initial parental leave (120/150 days): the benefit is paid by social security. For holiday and Christmas allowance purposes, the leave counts as time actually worked, so there is no reduction.
• Extended parental leave: optional unpaid periods can affect the calculation base. Assess case by case.

In any event, the holiday allowance follows the holiday entitlement that vests on 1 January each year — an acquired right, regardless of later absence.

Total cost to the employer

Each allowance costs the employer more than base pay: the 23.75% employer social security contribution and workplace accident insurance are on top.

Multiplying by the two annual allowances (holiday plus Christmas), and adding accident insurance (around 1% of the insurable base), the annualised cost of an employee comes to roughly 14.14 × gross monthly salary. That figure belongs in salary budgeting and in any decision to hire.

For companies planning the tax and cash-flow impact of year end: Modelo 22 corporate tax return 2026 — deadline, rate and payment →.

Common payroll mistakes

1. Including the meal allowance in the calculation base — the meal allowance, in cash or on a card, is not part of base pay. It therefore does not count towards the holiday and Christmas allowances, nor towards overtime calculations. More on the meal allowance in 2026 →
2. Not applying the separate withholding table — adding the allowance to the month’s salary and using the salary table inflates the withholding and pushes the employee into a higher bracket. Article 99-C(5) of the Personal Income Tax Code requires the allowance to be withheld separately. A common error when everything is processed on one payslip in November.
3. Forgetting the pro-rata on joining or leaving — paying a full month to someone who worked four costs the company money; underpaying someone who left in October invites a dispute. The formula (base pay × complete months) / 12 is mandatory.
4. Paying the Christmas allowance after 15 December — this is a labour offence, with a fine from the labour inspectorate and default interest payable to the employee. Some employers delay it for cash-flow reasons; it is bad practice.
5. Treating the “14th month” as a special tax regime — there is no tax exemption on the allowances. They are subject to income tax and social security like any other employment income.
6. Not updating the tables in January — income tax rates and brackets, the social support index, the minimum wage and the withholding tables all change every year. Payroll software has to be updated before the first payroll run of the year.
7. Filing the DMR late — allowances paid have to be declared in the DMR for the month concerned, by the 10th of the following month. Forgetting or delaying it brings a separate fine.

Recurring payroll errors are one of the most common triggers for inspections by the labour inspectorate and social security, and lead to regularisations with interest and fines. An annual review with your Chartered Accountant and a quarterly internal audit of processed payrolls are worth doing.

Frequently asked questions

When is the holiday allowance paid?

Before the holiday starts, at least 5 days in advance (Labour Code, art. 264). Many employers pay it in the month before the holiday is taken.

How is the Christmas allowance calculated?

One month of base pay for a full year. For partial years: (base pay × complete months) / 12. Deadline: 15 December.

Is the holiday allowance subject to income tax?

Yes, in full. It is withheld separately under article 99-C(5) of the Personal Income Tax Code, with social security at 11% employee and 23.75% employer.

What does the pro-rata rule mean?

Where the employee has not worked the full year: allowance = (base pay × complete months) / 12. It applies on joining, on leaving and to fixed-term contracts.

Does the holiday allowance count towards the IRS Jovem ceiling?

Yes. The annual ceiling of EUR 29,542.15 (55 × the social support index in 2026) covers total category A income — salaries, holiday allowance and Christmas allowance.

What happens if the contract ends before Christmas?

The employee is entitled to the Christmas allowance pro rata to the complete months worked in 2026, paid in the final settlement.