If you have ever had the feeling that you spent half your working life just to pay tax, you are probably not far wrong. What with income tax, national insurance/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, not to mention the amount we pay in VAT each year. 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 Economique Molinari, it measures and compares tax burdens across the EU to determine a “tax liberation day”, to show how much of a year’s work is devoted to paying taxes. While this study focuses on employees and how much tax and social security they pay, it illustrates the general tax burden of each country and how they compare to each other.
On average, 2016 sees a respite from ever-rising taxes, but it is very small. The average “real tax rate” for typical workers in the EU reduces from 45.19% last year to 44.96% this year. This is only the second time in the six years this study has been published that the rate has dropped, and taxes remain nearly 1% higher than in 2010.
Looking ahead, the report highlights that Europe’s population is ageing, resulting in higher pension and healthcare expenditure for governments. This does not bode well for future tax cuts as governments will need to raise revenue – as the population ages, there are less people in employment to pay for these costs. More than half the EU population (54.9%) were not in the labour force last year.
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.
According to the study, Portugal’s tax freedom day fell on June 15 this year. This means that for 167 days of 2016, every cent earned by the average Portuguese employee was taken by the government in tax.
This is three days later than last year, and 17 days later than in 2011, thanks to the tax rises applied over recent years to improve the deficit and comply with bailout conditions.
The average real average salary in Portugal is €21,577, but after taxes people are only left with €11,777 to spend on themselves and their families. The “real tax rate” in Portugal is 45.42%.
Portugal is not in a position to do much to reduce this tax burden. The proposed budget for 2017 does not include any significant changes to personal income tax, though there will be some changes to the deductibility of some expenses. The surtax introduced under austerity measures will be phased out in 2017.
Speaking at a conference on October 19, Portugal’s secretary of state for fiscal affairs, Fernando Rocha Andrade, acknowledged that the reduction of the tax burden for 2017 is “not as large as families and companies would need and as any government would like to make”.
The country with the latest tax freedom day this year is France, overtaking Belgium to the dubious honour of top spot. Its day remained the same as 2016 at July 29, with a real tax rate of 57.67%.
Cyprus continues to have the earliest tax freedom day with March 29 (and a real tax rate of 23.85%), followed by Malta with April 18, Ireland with April 30 and the UK with May 9.
According to this study, the UK’s tax freedom day remains the same as last year. The average real gross salary is €53,637, with workers getting to keep €34,709, making a real tax rate of 35.29%.
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.
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
