Tax freedom day varies greatly by country, but good tax planning can help reduce your tax burden, wherever you live. So, how long does it take to earn money for yourself instead of the taxman?
If you ever had the feeling that you have spent half your working life just paying tax, you’re not far wrong. What with income tax, national insurance/social security, capital gains tax, VAT, council tax, excise duties, and so on, a considerable amount of our income goes straight to the taxman each year.
Even if you’re retired, you still face tax on savings, investments, and pensions, not to mention the amount payable in VAT each year. Having paid so many taxes all your life, you’ll not want to pay more than necessary – that’s why tax planning plays such an important part in protecting your wealth.
Defining the tax burden of typical workers in the EU
For the last 13 years, the Institut Economique Molinari has been comparing the taxes payable by the average wage earner across the 28 EU member states (now EU plus the UK), measuring how many work days of each year are devoted to paying taxes. While it focuses on wages and the tax and social security employees pay, the study illustrates the general tax burden of each country and how they compare to each other.
The study calculates a “tax liberation day” for each country – the date on which an employee has earned enough to pay off all taxes for the year. It also identifies the average “real tax rate” for typical workers in each country (gross salary minus all tax liabilities).
The 2022 report reveals the average tax freedom day across the EU was 11 June, a day earlier than last year. 14 countries had an earlier tax freedom day this year thanks to continued pandemic relief measures and other rate changes, but eight countries are experiencing higher tax levies.
Cyprus had the earliest date on 15 April and next is Malta which landed on 26 April. Austria has the latest date – 18 July, followed closely by France with 17 July.
(Although the Institute expanded its study last year to include Australia, Brazil, Canada, Japan, South Africa and the USA, our article continues to focus on the European data.)
When is tax freedom day where you live?
There isn’t a set day of the year when the proverbial ‘tax freedom day’ occurs everywhere – the date differs between countries. So, let’s take a look at when it arrives for you.
France has the second latest tax freedom day in Europe, falling on 17 July. This means French employees worked 198 days this year just to pay their taxes, but at least this is 2 days less than 2021. While the average real gross salary is €54,594, their real tax rate is 54.15%, which leaves them with a real net salary of just €25,032.
The study reveals that Portugal’s tax freedom day landed on 13 June this year, two days later than 2021.
This means that for 166 days of 2022, every cent earned by the average Portuguese employee was taken by the government in tax. The average gross salary in Portugal is €24,104, but after the real tax rate of 44.73%, workers in the country are only left with just €13,322 to spend on themselves and their families.
According to the study, Spain’s tax freedom day fell on 7 June, 2 days earlier than last year, placing it eleventh in the rankings. This means that Spanish employees worked for 158 days of the year just to pay their tax bill.
The average gross salary in Spain is €34,988, but after the real tax rate of 43.2%, workers in the country are only left with €19,874 to spend on themselves and their families.
Cyprus is one of the countries where the tax burden is increasing, but it still remains the EU country with the lowest tax burden, according to this study. The real gross salary is €27,552 and the real tax rate 28.55%, giving workers a real net salary of €19,687. With a tax freedom date of 15 April, workers have paid off their taxes after 105 days.
Our tax and residency guides give more specific information on laws and legislation in all these countries, download them now.
What about the UK?
According to this study, the UK’s tax freedom day came as low as fourth, landing on 14 May, with a real tax rate of 36.71%.
However, many think tanks undertake their own research to calculate their country’s tax freedom day, using different methodologies. While the Institut Economique Molinari looks at income tax, social security contributions and VAT, the UK’s Adam Smith Institute (ASI) measures the entire tax take, including taxes that do not come directly out of the earner’s pocket.
The ASI’s approach places the UK’s 2022 date more than three weeks later, on 8 June. This is a week later than in 2021, and the latest date since reliable records began in 1995 (or since the mid-eighties looking at earlier but less reliable data).
The Adam Smith Institute expects the UK’s tax freedom day to continue to fall later in the year – and this was before the Autumn Budget with its various measures to increases taxation.
What does this mean for taxpayers?
Ageing populations put pressure on pension and healthcare spending for governments, as there are fewer younger workers paying taxes to pay for these benefits. And the Institut’s study found that in 10 of the 34 countries looked at, more than 20% of the population is now over age 65. And all the other countries (with the exception of South Africa) are expected to face the same problem by 2050. As it is, currently only 43.63% of EU citizens are in the work force.
This does not bode well for future tax cuts, especially since the pandemic has created additional budget worries for governments, which are also now dealing with the cost of living and energy crisis.
These therefore remain taxing times for taxpayers, and not just for workers, as retirees are also faced with higher taxes. Of course, the research is just indicative of the average taxpayer in each country – higher earners will generally have a later tax freedom day.
Tax freedom day – what more can you do to lower taxes?
In many cases, there are steps you can take to lighten your tax burden, especially on your capital investments and pensions. While we all have to pay our share of taxes, cross-border taxation is highly complex; do not risk getting it wrong or paying more than you have to. Take personalised, specialist advice on the compliant tax mitigation opportunities available in your country of residence and the UK – you may be surprised at how you can improve your tax situation.
Blevins Franks has more than 45 years of experience advising our clients in all aspects of their financial planning to help them legitimately lower their tax bills. We have teams of tax, investment and pensions specialists supporting our local advisers who have a deep understanding of regional tax legislation throughout Europe.
Contact us today.