There's been a lot of talk about tax this week. From the duties and VAT on fuel to the National Insurance increase coming in next month, tax has been in the news, and I suspect many accountants feel the same as me, about time too. You see, there's a lot of talk by politicians (of all parties, I'm not going all political here) around underfunded public services, we've all heard about how they suffered under austerity. But is that really true? You see, a lot of the public sector never had their budgets cut after the financial crises in 2008, and the public have never been taxed higher. Forget comparisons to 70 years ago. Back then there were no parking charges in hospitals, no speed cameras, no fines for putting your recycling in the wrong bin, no Insurance Premium Tax (IPT) etc. etc. you see, aside from the obvious taxes such as income tax, corporation tax, and the like, other taxes have either been introduced (airport taxes and IPT for example) and others have been increasing massively ahead of inflation for years, such as business rates (this crippling tax which is contributing to the closure of many businesses on the high street) and VAT which was 17.5% for years but is now 20%. And I haven't even mentioned green levies (yes those are another tax too). So let's explore exactly what the average person pays in tax.
Income tax
Using the median salary (this gives a more accurate figure than a straight average) the average salary in the UK for 20/21 was £31,285. If the same salary was earned in 2021/2022 then Income tax payable would be £3,743 and national insurance of £2,606.04. Tax and NI comes to just over 20% of salary. However, this is just the start. what about all the indirect taxes, VAT and the like every time we spend money?
We've used the following website https://www.nimblefins.co.uk/average-uk-household-budget#nogo to work out how much the average person pays in tax. The figures quoted are based on households of 2.4 people. We've assumed 2 tax payers per household.
VAT and duty on petrol and diesel
Fuel duty is a flat rate of 57.95p per litre on diesel and petrol, so as fuel costs rise, duty will not. However, with VAT at 20%, VAT revenue for the government does go up with the increase in fuel costs. VAT and duty combined account for more than 50% of cost to the consumer. Given that we are taxed on our income before we purchase the fuel, the amount of tax paid when earning enough to fill the fuel tank is astronomical.
The following table is a list average annual spending and the associated VAT.
Spend | Cost - Inc VAT | VAT |
Restaurants and hotels | £1,375.50 | £229.25 |
Recreation and culture (e.g., pets, gym fees, TV, etc.) | £1,230.00 | £205.00 |
Household (e.g., furniture, linens, appliances, etc.) | £949.00 | £158.17 |
Utilities (water, gas, electric) | £907.50 | £151.25 |
Package holidays | £715.00 | £119.17 |
Clothing and footwear | £608.50 | £101.42 |
Communications and TV/video services | £678.50 | £113.08 |
Personal (e.g., toiletries, jewellery, sunglasses, etc.) | £457.50
| £76.25 |
Vices (e.g., alcohol, tobacco, etc.) | £335.50 | £52.42 |
Miscellaneous | £135.00
| £22.50 |
Licences, fines and transfers (e.g., stamp duty, road tax) | £99.00
| £16.50 |
Holiday spending | £314.50 | £55.92 |
TOTAL | 10,330 | £1,738.17 |
VAT is not the only indirect tax that we pay. If we travel abroad we pay airport taxes. When we purchase insurance we pay Insurance Premium Tax, IPT and of course in addition to all that we pay council tax. The average annual spend on insurance is £502 with IPT of £83.67. There are two rates of IPT, but we've gone with the higher rate of 20% as the annual insurance cost will be made up mainly of car insurance. The average annual council tax bill is £676, or £338 per person.
So where does all of the above leave us?
Average earnings £31,285
Income tax £3,743
National Insurance £2,606
VAT £1,738
IPT £83
Council Tax £338
Total £8,508
So looking at the above, the effective tax rate is just over 27%. Of course, the above changes dramatically for smokers, drinkers and higher rate tax payers. A smoker who smokes 20 a day would see their annual tax burden rise by an eye watering £3,251, with VAT and duties making up over £8.90 on a £10 pack of cigarettes. Fancy a bottle of wine? Duty on wine is £2.23 per 75cl bottle, regardless of price, so that £5.99 bottle of merlot? Yep, the government receive around £3.23. One of those per week? that's another £168 in tax. If you aren't clean living then, i.e. a bottle of wine per week and a 20 a day cigarette habit, the amount of tax you pay could be nearly £12,000.
The above figures are very conservative. For example, if you have a new car on finance, your transport costs will be much higher than the transport costs above and you could see yourself paying thousands a year more in VAT. Likewise travel excludes fuel duty, and there are duties on a lot of imports.
So are we a high tax or low tax country? Well as you can see the picture is a lot more complicated than the media tell us. A lot depends on what we spend our hard earned money on. As we can see above, a clean living, non-smoking or drinking family, without a car on finance could well have a much lower tax bill than a family with two smokers and a car on credit who enjoy the odd bottle of wine or beer or two. What is clear though, is that regardless of which party has been in power, the percentage of tax we pay overall has been steadily rising and is likely to rise further. Don't forget, National Insurance and tax on dividends will be increasing, and whilst it is advertised as a 1.25% increase, it is in reality much more than that. Class 1 NI paid by employees is 12%. A 1.25% hike represents a 10.4% increase in real terms. And for dividends that were paid at 7.5%, it represents a 16.7% increase. So if you have an owner managed company, you may see both of those increases, as well as an increase the NI that employers pay. There has been a call to scrap the increase, even from the conservative back benches but that seems to have fallen on deaf ears and Rishi Sunak is poised to go ahead regardless.