Portugal has one of the most unequal income distributions in Europe and poverty levels are high. The economic crisis has halted a long-term gradual decline in both inequality and poverty and the number of poor households is rising, with children and youths being particularly affected. Unemployment is one of the principal reasons why household incomes declined. The tax and benefit system alleviates both inequality and poverty significantly. The tax system is markedly progressive, and recent tax reforms have likely increased this progressivity. Transfer payments, especially non-pension benefits, are reducing inequality and poverty in a fairly efficient way. Nonetheless, a number of adjustments could strengthen the equalising role of the benefit system, which is generally biased towards benefits for elderly people, while families with children should receive more support. Raising income thresholds in the guaranteed minimum income scheme could be a well-targeted way to support the most vulnerable households, in particular families with children. Unemployment benefits also contain a significant bias towards older recipients, while their coverage is still relatively low. In-work tax credits for low-income earners may be a more effective way to support low-income families than raising the minimum wage, which could lead to job losses. The education system should provide more support to students at risk of falling behind to reduce grade-repetition and drop-out rates, while further increasing class sizes would be a reasonable way to generate savings without affecting learning progress much. Scaling up vocational courses and adult education, including in the context of active labour market policies, could improve the capacity of many households to generate income and lead to a more equitable income distribution.