The Squeezed Middle

Are you paying too much tax? If you are an employee on average earnings, you may be surprised to realise how much you are giving to the government.

Average UK earnings is currently around £500 a week.  Of this you pay £75 in income tax, and £43 in National Insurance Contributions (NICs). This totals £118 a week. So almost a quarter of your money disappears before you get your salary.

This leaves you with a net income of £382 a week. Let’s make a few assumptions, based on various spending surveys for people on average earnings:

• you spend £50 a week on food, of which 80% bears VAT - so you pay tax of £8
• you spend £30 on petrol or diesel. The tax and duty included in the price is around £20
• clothes and shoes average out at just over £17 a week, of which £3.50 is VAT
• electricity and gas bills come to £20, and the VAT included is £1
• car, house and life insurance comes to £30, and the insurance premium tax included is £6
• your car lease costs are £20 a week, another £4 in VAT
• you live in a Band C house, and pay £25 a week in council tax.
• your house needs repairs or replacement items, costing around £15 a week - VAT of £3
• you eat out once a week, costing £30, including VAT of £6
• you go out to a concert, cinema or theatre once a week, costing £20, including VAT of £4
• you spend £10 a week on the lottery. This includes tax and duty of over £1
• you take two holiday breaks a year, which averages out at £13 a week, including VAT of £2.50 plus £9 of airline passenger duty for yourself and your family.
• you spend around £30 on rent or mortgage, which doesn’t carry any tax, and around £10 on newspapers, books, and public transport, none of which directly suffer tax (although of course the underlying businesses also pay taxes and duties, so there is some tax hidden in their prices)
• the average spend on alcohol and tobacco for people earning around £500 a week is £11 a week, including around £7 of tax and duty
• So far, this shopping list uses up £331 of your remaining income. The balance of £51 is miscellaneous expenditure, such as presents, pet food, computer equipment, phone calls etc - costing another £10 in tax.

Looking through this list, you can see that hidden in your total spending of £382 a week is around £110 of further tax. Adding the £110 of invisible tax to the £118 on your payslip makes your total tax is £228 - over 45% of your salary.

Not only is this a very high number in absolute terms, it is also high relative to other people’s tax bills.

The self-employed pay lower NICs than employees - 9% rather than 12% - and they have more generous expense reliefs. And people on above-average earnings actually pay less tax: once earnings exceed £770 a week, the NICs rate for both employees and the self-employed drops to 2% - compared to the 12% paid by employees on average earnings. And of course the rich spend a much smaller percentage of their income on household necessities, so can avoid tax simply by hoarding their money.  

So if you are an employee on average earnings, and feel fiscally squeezed, this isn’t an illusion.  The taxes you bear are heavy - and may force you to tighten your belt.

Anne Redston is a visiting professor at King’s College, London and a barrister at Temple Tax Chambers

The information contained in this article is intended to provide only a general outline of the subjects covered.  It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice.  The author and the publisher disclaim all responsibility for any loss arising from any action taken or not taken by anyone using the information in this document