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, social security, capital gains tax, VAT, council tax, excise duties etc, a considerable amount of our income goes straight to the taxman each year.
Even if you are retired, you still face tax on savings, investments and pensions, not to mention VAT. 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 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 UK), measuring how many work days 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 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 identifies the average “real tax rate” for typical workers in each country (gross salary minus tax liabilities).
2022’s report reveals the average tax freedom day across the EU was June 11, a day earlier than 2021. Fourteen countries had an earlier tax freedom day, thanks to continued pandemic relief measures and other rate changes, but eight countries are experiencing higher tax levies.
Cyprus had the earliest date with April 15, while Austria has the latest date with July 18, with France just a day earlier.
(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.)
How did Portugal fare?
The study reveals that Portugal’s tax freedom day landed on June 13 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.
What about the UK?
According to this study, the UK’s tax freedom day landed on May 14, 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 June 8. This is a week later than 2021, and the latest date since reliable records began in 1995 (or since the mid-eighties looking at earlier but less reliable data).
The ASI 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. The Institut Economique Molinari study found that in 10 of the 34 countries examined, more than 20% of the population is now over age 65. And all the other countries (except 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 remain taxing times for taxpayers, and not just for workers as retirees are also faced with higher 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 Portugal and the UK – you may be surprised at how you can improve your tax situation.
Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should seek personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
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).