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New Income Tax Law Brings Important Changes: Taxpayers with Incomes of up to R$ 5 Thousand Will Be Benefited, While Those Earning More than R$ 50 Thousand Will Face Significant Impacts on Rates and Deductions.
A new proposal to amend the Income Tax law promises to significantly impact the lives of millions of Brazilians in the coming years. Presented as a major victory for taxpayers, the measure still awaits a vote for final approval but is already generating positive expectations. According to information from G1, the new law could exempt up to 36 million people from paying Income Tax by 2026.
The proposal aims to correct the historical discrepancy in the tax table, mainly benefiting low- and middle-income workers. If approved, this change will represent a milestone in the Brazilian tax system, bringing financial relief to millions of families.
When Does the New Income Tax Law Take Effect?
Scheduled to take effect only in 2026, the changes to Income Tax depend on approval in Congress. The exemption, however, will not be universal, as those earning above R$ 5 thousand will have their benefits gradually reduced, with a transition that covers salaries of up to R$ 7,500, avoiding sudden increases in tax.
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By decision of President Luiz Inácio Lula da Silva, the government included in the announcement the exemption from Income Tax for those earning up to R$ 5 thousand per month and an increase in taxes for those earning above R$ 50 thousand. Thus, with the new Income Tax law, for those earning more than R$ 50 thousand, the minister’s main plan is to establish a minimum effective tax rate of 10%.
However, for those at the other end earning less than R$ 5 thousand, the changes in Income Tax are positive, as the government promises to keep these workers out of the reach of the infamous Federal Revenue Lion.
How Does the Income Tax Work Currently?
The new income tax law under Lula’s government for those earning up to R$ 5 thousand per month promises to be a help for thousands of Brazilians, meaning a great gift to workers. However, the new Income Tax law still requires approval before taking effect.
Currently, the Income Tax table establishes that those receiving up to two minimum wages (R$ 2,824) also do not declare the tax. Moreover, it is worth noting that the tax does not apply to total salary. For example, the amount deducted for the INSS does not count. Income tax rates are not applied integrally on all earnings.
In the opinion of tax lawyer and master’s degree holder in Law from PUC-SP, Thulio Carvalho, despite the government’s information about plans to compensate for this measure by increasing taxes on those earning above R$ 50 thousand monthly or R$ 600 thousand per year, there is emerging uncertainty in the country’s fiscal scenario.
How Does the 10% Tax Work for Salaries of up to R$ 50 Thousand?
As a way to offset the changes in Income Tax for earnings of up to R$ 5 thousand per month, the Lula government will propose to Congress an effective rate of 10% for those earning more than R$ 50 thousand per month.
Currently, although the income tax rate for this income bracket is 27.5%, many taxpayers with earnings in this range manage to pay less tax by receiving most of their income from other less-taxed sources, such as through dividends.
With the new Income Tax law, the government intends to sum all sources of taxpayers’ income, from those taxed at source to the exempt ones, and calculate who is paying less than 10% on the total.
These taxpayers would then be required to contribute with the new tax on their annual income tax return to neutralize this difference. For example, if a person pays 5% in income tax on their income, they will need to pay more than 5% to reach 10%.
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