If you have ever had the feeling that you spent half your working life just to pay tax, you are probably not far wrong. What with income tax, national insurance/social security, capital gains tax, VAT, council tax, excise duties etc, a considerable amount of our hard earned income is lost in tax each year.
If you are lucky enough to be retired you are still faced with tax on your savings, investments and pensions, not to mention the amount we pay in VAT each year. Having paid so much tax all your life, you will not want to pay any more tax now than you absolutely have to – tax planning is an important part of protecting your wealth in retirement.
An annual study, The Tax Burden of Typical Workers in the EU 28, determines the “tax liberation day” for individuals working in each EU State. Carried out by the Institut Economique Molinari, it measures and compares tax burdens across the EU to determine a “tax liberation day”, to show how much of a year’s work is devoted to paying taxes. While this study focuses on employees and how much tax and social security they pay, it illustrates the general tax burden of each country and how they compare to each other.
On average 2017 sees a respite from ever-rising taxes, for the third year in a row, but it is very small. The average “real tax rate” for typical workers in the EU reduces from 44.96% last year to 44.8% this year. Taxes remain nearly 1% higher than in 2010.
Looking ahead, the report highlights that Europe’s population is aging, resulting in higher pension and health care expenditure for governments. This does not bode well for future tax cuts as governments will need to raise revenue – as the population ages, there are less people in employment to pay for these costs. Only 45.4% of EU citizens were in the labour force in 2016. The report concludes that “budget cuts and economic growth remain workers’ best hopes against tax increases in the near term”.
Tax freedom day is the day each year when you finally stop working to pay tax to the government, and start earning money for yourself.
According to the study, Spain’s tax freedom day fell on 8th June. This means that for 159 days of the year, every cent earned by the average Spanish employee was taken by the government in tax.
This is the same as last year, and a long way off the 19th May tax freedom day we had in 2011.
The average gross average salary in Spain is €34,111, but after taxes people are only left with €19,3337 to spend on themselves. The “real tax rate” in Spain is 43.31%.
Cyprus continues to have the earliest tax freedom day with 27th March, followed by Malta with 19th April, Ireland with 26th April and the UK with 9th May.
According to this study, the UK’s tax freedom day remains the same as last year, with a real tax rate of 35.08%.
Many countries across the world calculate their tax freedom day, though it tends to be private institutes which do this, rather than the government. They use different methodologies, resulting in different dates for the same country.
In its calculations, the Institut Economique Molinari looks at income tax, social security contributions and VAT.
In the UK, the Adam Smith Institute (ASI) measures the entire tax take, including taxes that do not come directly out of the earner’s pocket. It calculates that the UK’s tax freedom day fell on 11th June, six days later than last year, and “the chancellor gobbles up the first 162 days of our earnings – from every source”.
These remain taxing times for taxpayers, and not just for workers as retirees are also faced with higher taxes. And of course there is no average person, and higher earners will generally have a later tax freedom day.
In many cases, however, there are steps you can take to lighten your tax burden on your capital investments and pensions. While we all have to pay our share of taxes, do not risk paying more than you have to. Seek specialist advice on the compliant tax mitigation opportunities available in Spain and UK for your investment assets, you may be surprised at how you can improve your tax situation.
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This article was updated on the 5th of September, 2017.