If you have ever had the feeling that you spent half of your life working just to pay tax, you are probably not far wrong. With income tax, social security, capital gains tax, VAT, council tax, excise duties etc., a considerable amount of our hard-earned income is lost in tax each year.
If you are lucky enough to be retired, you are still faced with tax on your savings, investments and pensions. Having paid so much tax all your life, you will not want to pay any more tax now than you absolutely have to – tax planning is an important part of protecting your wealth in retirement.
An annual study, The Tax Burden of Typical Workers in the EU 28, determines the “tax liberation day” for individuals working in each EU State. Carried out by the Institut Économique Molinari, it measures and compares tax burdens across the EU to show how much of a year’s work is devoted to paying taxes.
Levies on the average worker remain high thanks to austerity measures. There was a slight dip this year though, with the average real tax rate of 45.19% compared to 45.27% in 2014.
The report highlights that over half the EU population (56.2%) are not in the labour force. This means that working people carry most of the tax weight. As Europe’s population ages, the State’s pension and health care expenditure increases, but there are fewer people in employment to pay for these costs.
Governments may need to keep taxes higher, or raise them again in future, to cover pension and social welfare costs. In June, the Portuguese Health Minister, Paulo Macedo, indicated that tax hikes are necessary to finance increasing health care costs.
Tax freedom day is the day each year when you finally stop working to pay tax to the government, and start earning money for yourself.
Belgium continues to have the latest day, falling this year on August 6, with France coming in second place with July 29.
Cyprus has the earliest tax freedom day with March 31, followed by Malta with April 19.
According to the study, Portugal’s tax freedom day fell on June 12. This means that for 163 days of the year, every cent earned by the average Portuguese employee was taken by the government in tax.
This is six days later than last year, and 14 days later than 2011, thanks to the tax rises applied over recent years to improve the deficit and comply with bailout conditions.
The average gross salary in Portugal is €21,452, but after taxes people are only left with €11,924 to spend on themselves.
There does not seem to be much evidence yet that the government can reduce tax rates here. Last month the International Monetary Fund said Portugal needs to carry out a bold programme of tax hikes and deep spending cuts to improve its dangerously high debt levels.
Tax freedom day is calculated by many countries across the world, though it tends to be private institutes which do this, rather than the government. They use different methodologies, so you can come across different dates for the same country.
In its calculations, the Institut Économique Molinari looks at income tax, social security contributions and VAT. It calculated that the UK had a tax freedom day of May 9 this year.
In the UK, the Adam Smith Institute (ASI) carries out a separate study, and its methodology includes indirect, local and stealth taxes. It calculates that tax freedom day arrived on May 31.
ASI director, Eamonn Butler, commented: “The Treasury hates tax freedom day, because they don’t want us to know how much tax we really pay. They prefer to conceal the tax burden through stealth taxes and indirect taxes that we don’t even realise we’re paying.”
The ASI also calculates a “Cost of Government Day” to show the extent of the UK’s debt. The debt will have to be repaid eventually, with taxpayers picking up the bill. This year, it falls on June 29.
These remain taxing times for taxpayers, and not just for workers, as retirees are also faced with higher taxes. And of course, there is no average person and higher earners will generally have a later tax freedom day. In many cases, however, there are steps you can take to lighten your tax burden on your capital investments and pensions. While we all have to pay our share of taxes, do not risk paying more than you have to. Seek specialist advice on the compliant tax mitigation opportunities available to you in Portugal and UK.
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; an individual is advised to seek personalised advice.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com
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