If you 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 VAT. Having paid so much tax all your life, you will not want to pay any more 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 New Direction Foundation for European Reform and Institut Economique Molinari, it measures and compares tax burdens across the EU.
The average EU “real tax rate” rose to 45.27% for 2014, continuing the upward trend since the study began in 2010.
Co-author and Institut Economique Molinari director, Cécile Philippe, commented: “EU states continue to spend too much and tax rates have continued to increase in many countries … Our states are doing too much, leaving less space for individual choice and responsibility. It is about time to rethink our model.”
Over half of the EU population (54.6%) are not in the labour force. Therefore, tax-wise, working people carry most of the weight – “a weight that grows heavier as populations grow even older”.
Governments may need to keep taxes higher, or raise them again in future, to provide funds for their increasing pension and social welfare costs brought about by an ageing population.
Tax freedom day is the day each year when you finally stop working to pay tax to the state, and start earning money for yourself.
Belgium has the latest day, falling on August 6, with France coming in second place with July 28.
Cyprus has the earliest tax freedom day with March 21, followed by Malta and Ireland with April 28.
Portugal’s tax freedom day fell on June 6. This means that for 157 days of the year, every cent earned by the average Portuguese employee was taken by the government in tax.
This is eight days later than in 2011, thanks to the tax rises applied over recent years to improve the deficit and comply with bailout conditions.
The gross average salary in Portugal is €19,453, but after taxes people are only left with €11,109 to spend on themselves and their families.
Last year, Portuguese taxpayers paid €37.5 billion in taxes, and the government is aiming to increase it to over €40 billion this year. We also need to prepare for further tax rises. When at the end of May the Constitutional Court rejected the austerity measures outlined in the 2014 budget, it created a fiscal gap of around €800 million. The government needs to fill this somehow, and tax hikes are one likely method.
Many countries across the world calculate their tax freedom day, though it tends to be private institutes, rather than governments. They use different methodologies, so you can come across different dates for the same country.
In its calculations, the Institut Economique Molinari looks at income tax, social security contributions and VAT. It calculated that the UK had a tax freedom day of May 12 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 28. ASI Director, Eamonn Butler, commented: “Tax freedom day comes three days earlier this year, but it is still outrageous that the average person in Britain has to work nearly five months of every year solely to pay taxes. Are we really getting five months’ worth of value from our bloated government sector?”
The ASI 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 26.
These remain taxing times for taxpayers, and not just for workers as retirees are also faced with higher taxes. 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 legitimate 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
