How Much Of Your Income Do You Lose In Tax Each Year?

16.06.10

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Do you ever get the feeling that out of all the hours you spend (or spent if you are luckily enough to be retired) at work, half of them were just so that you could cover your tax bill? What with

Do you ever get the feeling that out of all the hours you spend (or spent if you are luckily enough to be retired) at work, half of them were just so that you could cover your tax bill? What with income tax, national insurance/social security, capital gains tax, VAT, council tax, excise duties etc, just how much of your hard earned income do you lose in tax each year?

Well, to take the UK as an example, the average taxpayer worked a rather staggering 149 days simply to earn enough to pay tax for the year. 41% of their income will be handed over to the government.

There are rather disheartening statistics ? and they?re probably only going to get worse.

The Adam Smith Institute in the UK calculates what is generally referred to as ?Tax Freedom Day? ? the day when taxpayers stop working for the government and start working for themselves.

This year, Tax Freedom Day fell on 30th May, three days later than last year. So up to and including 29th May, every penny earned by the average British taxpayer was given over to the government to help pay for its spending.

We should spare a thought for taxpayers in Hungary, who have to wait until 6th August to be free of their tax obligations. This is according to a 2010 study on ?Wages and Taxes for the Average Joe in the EU 27?, carried out in Belgium by L?Anglophone newspaper and the Institut Economique Molinari. Belgium has the second latest day at 3rd August. According to the research, French residents have to wait until 26th July; Portuguese until 30th May and Spanish until 16th May. Cyprus has the earliest date at 13th March.

Returning to the UK research, the Adam Smith Institute calculates the date by comparing general tax revenue (direct and indirect taxes, local taxes and National Insurance contributions) with Net National Income (NNI). The total of all government tax revenue is calculated as a percentage of NNI at market prices and then converted to days, starting from 1st January.

It points out that their workings are only based on tax receipts ? they do not take the government?s budget deficit into account. This is significant and can be misleading, since the situation is actually worse than it appears.

Executive director, Tom Clougherty, explains:

?Since all budget deficits eventually have to be financed, borrowing should be viewed as deferred taxation. Our government relies so much on debt to fund their spending, that our traditional Tax Freedom Day measure makes them look more virtuous than they actually are. In reality, all they are doing is piling up obligations on future taxpayers.?

If the government funded all its expenditure from taxes rather than loans, Tax Freedom Day would not arrive until 8th July.

According to the Adam Smith Institute, this gap points to Britain?s worst fiscal position since 1976 and suggests that Britons will face ?savage tax rises? unless public spending is brought under control.

Chancellor George Osborne intends to reduce the deficit with around 80% of spending cuts and 20% of tax rises ? but this is not fixed and we don?t yet know exactly what will transpire. Cuts in tax benefits and credits would also increase many taxpayers? liability.

The Institute?s research shows that, had the government kept public spending under control since 2000 (the last time it managed to balance the books), the situation today would have been ?radically different.

The government spent ?367.1 billion in the 2000-01 tax year. If this had only increased in line with inflation, today?s spending would be ?440.8 billion ? but the amount the government expects to spend for 2010-11 is ?704 billion! The ?263.2 billion difference would, according to the Adam Smith Institute, have been enough to wipe out the ?163.8 billion deficit plus abolish all National Insurance contributions as well as inheritance tax.

That?s certainly food for thought.

The break down of how long Britons had to work to pay their taxes this year is as follows –

Income tax ? 41 days

National insurance ? 27 days

VAT ? 21 days

Excise duties ? 13 days

Corporation tax ? 12 days

Council tax ? 7 days

Business rates ? 7 days

Stamp duty ? 3 days

Miscellaneous taxes ? 18 days

The VAT rise in January was the key factor in delaying Tax Freedom Day, adding 1.5 days.

The Association of Chartered Certified Accountants (ACCA) warns that Britons can expect fewer ?tax free days? in the years to come. The new 50% tax band still needs to be added in, as do the restrictions on pensions relief. Then, as part of its deficit reduction measures, the coalition government is expected to increase capital gains tax on non-business assets and possibly hike VAT. It?s also likely to cut benefits and tax breaks, all of which will help push Tax Freedom Day later.

These are rather taxing times for taxpayers, and not just in the UK. Other European countries, particularly those struggling with weak economies and high deficits, are already starting to raise taxes. I would not be at all surprised if more followed.

In many cases, however, there are still steps you can take to lighten your tax burden. While we all have to pay our share of taxes, you won?t want to pay more than you have to. In the UK, for example, it is calculated that Britons will pay ?9 billion in unnecessary tax this year. If you don?t want that to happen to you, ask an international tax and wealth management advisory firm like Blevins Franks for information on legitimate tax mitigation opportunities for your country of residence, and for the UK if you may return there in future.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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