How long does it take to earn money for yourself instead of the taxman? “Tax freedom day” varies greatly by country, but good tax planning can help reduce your burden, wherever you live.
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 are retired, you’re still faced with 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 won’t want to pay more than necessary. That’s why tax planning plays such an important part in protecting your wealth.
If you thought you paid too much tax in 2021, now is the time to take action to improve your situation in 2022. Blevins Franks will provide you with a specialist wealth management adviser to review your tax planning for your country of residence. You may be able to take advantage of local opportunities to reduce your tax bill, particularly on your savings and investments.
Defining the tax burden of typical workers in the EU
For the past 11 years, the Institut Economique Molinari has been measuring taxes payable across EU member states. Its 2021 edition has been given a global expansion to include Australia, Brazil, Canada, Japan and the USA. This brings the total number of countries studied to 34, collectively representing 58.2% of the global economy.
The report focuses on employees and the tax and social security they pay, illustrating the general tax burden of each country and how they compare to each other.
The study calculates a “tax liberation day” for each member state – 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).
While the 2020 report revealed a statistical increase in real tax rate on EU workers’ salaries of 0.3% due to Brexit, the global pandemic has brought a small amount of tax relief, decreasing the average rate back to 44.5% this year.
Be aware of “hidden” taxes
An additional €40 is paid on top of gross salaries as employer social security contributions for every €100 of payroll taxes taken by governments. This levy is not recorded on wage slips for many countries.
How did countries fare for tax freedom day?
The new ‘global’ report issued by the Institut Economique Molinari places South Africa and the USA as first and second respectively, but Cyprus retains top position for Europe with 14 April. This is nine days ahead of runner-up Malta on 23 April, with the UK taking the third European spot on 11 May. When it comes to the lowest real tax rate, Cyprus leads Europe at 28.42% with Malta following at 30.83%.
The countries with the latest tax freedom day this year is a tie between Austria and France. With the highest real tax rates of 54.76% and 54.62% respectively, the symbolic date when Austrian and French workers stopped paying tax was over halfway through the year, landing on 19 July.
France’s tax freedom day
For the sixth year running, France has the dubious honour of holding the latest tax freedom day (alongside Austria) – on 19 July. France had started to show improvement in 2019 with its earliest recorded date but has not improved further since then.
This means the symbolic date when French workers stopped paying their tax is over halfway through the year – more than three months behind European winner, Cyprus! French employees worked for 200 days of the year just to pay their tax bill.
France also maintains one of the highest real tax rates of 54.62%. The average gross salary is relatively high at €56,119, but after taxes workers are only left with €25,466 to spend on themselves and their families.
Despite these results, Blevins Franks can show how France can be a tax-efficient place to live with proper financial planning, especially for retirees with capital to invest.
Portugal’s tax freedom day
The study reveals that Portugal’s tax freedom day landed on 11 June this year, the same as 2020, and 13 days later than in 2011 when tax rises were introduced. It now has the 13th latest day in Europe.
This means that for 162 days of 2021, every cent earned by the average Portuguese employee was taken by the government in tax. The average gross salary in Portugal is €23,249, but after the real tax rate of 44.36%, workers in the country are only left with just €12,935 to spend on themselves and their families.
That said, the prospect of living in Portugal can be a very positive one from a tax perspective if you have taken the time to seek personalised, expert advice from Blevins Franks.
Spain’s tax freedom day
According to the study, Spain’s tax freedom day fell on 9 June, a day later than was reported last year, pushing Spain to 11th place in the European rankings. This means that Spanish employees worked for 160 days of the year just to pay their tax bill. This is a day more than the previous four years, and is a long way off the 19 May tax freedom day enjoyed back in 2011.
The average gross salary in Spain is €35,771, but after the real tax rate of 43.71%, workers in the country are only left with €20,137 to spend on themselves and their families.
What about the UK tax freedom day?
According to the study, the UK’s tax freedom day again comes third for Europe this year, landing on 11 May, with a real tax rate of 35.78 %.
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 2021 tax freedom day almost three weeks later, on 31 May. This is the latest date for the UK since comparable records began in 1995.
Another noteworthy point is the announcement by the UK government to raise national insurance contributions by 1.25%, higher tax rates for dividends and a 12-month suspension on the triple lock. These increases were announced in September 2021 and are due to take effect in April 2022.
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What does this mean for taxpayers?
The Institut’s overall outlook is that ageing populations are putting pressure on pension and healthcare spending for governments throughout the EU. This does may not bode well for future tax cuts; as the population ages and fewer people are actively employed, taxpayers are required to plug the gap. However, there may be a silver lining to be found.
Although less than half of the EU’s 448 million citizens are currently in the labour force, the report states that “A great recovery has begun, jobs are becoming available, and new advances in teleworking make employment possible for a greater number than ever before”.
The report also concludes that “by lowering the taxes levied on employees and employers”, workers will be able to spend more of their hard-earned wages, quickening the journey toward prosperous economic growth.
Steps you can take
As we all do our part in rebuilding the damage caused by the Covid pandemic, ther are certainly some ‘taxing’ times ahead of us. However, almost every European country has seen a rise in average salary figures, indicating we are headed in the right direction.
Of course, the research is just indicative of the average taxpayer in each country – higher earners will generally have a later tax freedom day.
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; don’t risk getting it wrong or paying more than you legitimately have to. Blevins Franks provide personalised, specialist advice on the compliant tax mitigation opportunities available in your country of residence – you may be surprised at how you can improve your tax situation.
Contact us to receive personalised advice about efficient tax planning and wealth management today.
All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice.