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Tax freedom day – how much of your income do you lose to tax?

How long does it take to earn money for yourself instead of the taxman? “Tax freedom day” varies greatly by country, but good planning can help reduce your tax burden. If you think you paid too much tax in 2023, now is the time to review how you hold your assets and establish if you can improve your tax position in Portugal.

If you ever had the feeling that you have spent half your working life just paying tax, you are 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 are 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 will 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 14 years, the Institut Economique Molinari has compared the taxes payable by the average wage earner across the 28 EU member states (now EU plus the UK), measuring how many workdays of each year are devoted to paying taxes. While it focuses on wages and the tax and social security employees pay, it illustrates the general tax burden of each country and how they compare.

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).

2023’s report reveals the average tax freedom day across the EU was June 10, a day earlier than 2022. Ten countries had an earlier tax freedom day, with Croatian taxpayers gaining 10 days, but nine countries are experiencing higher tax levies.

Cyprus had the earliest date with April 16 and followed by Malta with April 27. France resumed its position as the country with the latest tax freedom day with July 17.

How did Portugal fare?

The study reveals that Portugal’s tax freedom day landed on June 12 last year, one day earlier than 2022.

This means that for 165 days of 2023, every cent earned by the average Portuguese employee was taken by the government in tax. The average gross salary in Portugal is €25,495, but after the real tax rate of 44.4%, workers are only left with just €14,166 to spend on themselves and their families.

What about the UK?

According to this study, the UK had the third lowest tax freedom day, landing on May 9, with a real tax rate of 35.2%.

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 2023 date more a month later, on June 18. This is 10 days later than in 2022, which itself was a week later than in 2021. It is 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 to hit June 23 in 2025, the latest since the early 1960s according to historical data.

How much tax did you pay in 2023?

Of course, the research is just indicative of the average taxpayer in each country – higher earners will generally have a later tax freedom day, though if you are retired then you do not have social/national insurance contributions.

Every taxpayer is different, but if you felt you paid too much tax in 2023, now is the time to take action to see if you can mitigate your liabilities in 2024.

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 Portugal and the UK – you may be surprised at how you can improve your tax situation.

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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By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008.  He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).