How long does it take to earn money for yourself instead of the taxman? "Tax freedom day" varies greatly by country, but good tax planning can help reduce your burden, wherever you live.

If you ever had the feeling that you have spent half your working life just paying tax, you are not far wrong. What with income tax, national insurance/social security, capital gains tax, VAT, council tax, excise duties and so on, a considerable amount of our income goes straight to the taxman each year. 

Even if you are retired, you are still faced with tax on savings, investments and pensions, not to mention the amount payable in VAT each year. Having paid so many taxes all your life, you will not want to pay more than necessary – that’s why tax planning plays such an important part in protecting your wealth.  

If you thought you paid too much tax in 2021, now is the time to take action to improve your situation in 2022.  Ask a specialist wealth management adviser to review your tax planning for Spain. You may be able to take advantage of local opportunities to reduce your tax bill, particularly on your savings and investments.

Defining the tax burden of typical workers in the EU

For the past 11 years, the Institut Economique Molinari has been measuring taxes payable across EU member states. Its 2021 edition has been given a global expansion to include Australia, Brazil, Canada, Japan and the USA. This brings the total number of countries studied to 34, collectively representing 58.2% of the global economy.

The report focuses on employees and the tax and social security they pay, illustrating the general tax burden of each country and how they compare to each other.

The study calculates a “tax liberation day” for each member state – the date on which an employee has earned enough to pay off all taxes for the year. It also identifies the average “real tax rate” for typical workers in each country (gross salary minus all tax liabilities).

While the 2020 report revealed a statistical increase in real tax rate on EU workers’ salaries of 0.3% due to Brexit, the global pandemic has brought a small amount of tax relief, decreasing the average rate back to 44.5% this year.

Be aware of “hidden” taxes

An additional €40 is paid on top of gross salaries as employer social security contributions for every €100 of payroll taxes taken by governments. This levy is not recorded on wage slips for many countries.

How did Spain fare?

According to the study, Spain’s tax freedom day fell on 9 June, a day later than was reported last year, pushing Spain to 11^th place in the European rankings. This means that Spanish employees worked for 160 days of the year just to pay their tax bill. This is a day more than the previous four years, and is a long way off the 19 May tax freedom day enjoyed back in 2011.

The average gross salary in Spain is €35,771, but after the real tax rate of 43.71%, workers in the country are only left with €20,137 to spend on themselves and their families.

The country with the latest tax freedom day this year is a tie between Austria and France. With the highest real tax rates of 54.76% and 54.62% respectively, the symbolic date when Austrian and French workers stopped paying tax was over halfway through the year, landing on 19 July.

The new ‘global’ report issued by the Institut Economique Molinari places South Africa and the USA as first and second respectively, but Cyprus retains top position for Europe with 14 April. This is nine days ahead of runner-up Malta on 23 April, with the UK taking the third European spot on 11 May. When it comes to the lowest real tax rate, Cyprus leads Europe at 28.42% with Malta following at 30.83%.

What about the UK?

According to the study, the UK’s tax freedom day again comes third for Europe this year, landing on 11 May, with a real tax rate of 35.78 %.

However, many think tanks undertake their own research to calculate their country’s tax freedom day, using different methodologies. While the Institut Economique Molinari looks at income tax, social security contributions and VAT, the UK’s Adam Smith Institute (ASI) measures the entire tax take, including taxes that do not come directly out of the earner’s pocket.

The ASI’s approach places the UK’s 2021 tax freedom day almost three weeks later, on 31 May. This is the latest date for the UK since comparable records began in 1995.

Another noteworthy point is the announcement by the UK government to raise national insurance contributions by 1.25%, higher tax rates for dividends and a 12-month suspension on the triple lock. These increases were announced in September 2021 and are due to take effect in April 2022.

What does this mean for taxpayers?

The Institut’s overall outlook is that ageing populations are putting pressure on pension and healthcare spending for governments throughout the EU. This does may not bode well for future tax cuts; as the population ages and fewer people are actively employed, taxpayers are required to plug the gap. However, there may be a silver lining to be found.

Although less than half of the EU’s 448 million citizens are currently in the labour force, the report states that “A great recovery has begun, jobs are becoming available, and new advances in teleworking make employment possible for a greater number than ever before”

The report also concludes that “by lowering the taxes levied on employees and employers”, workers will be able to spend more of their hard-earned wages, quickening the journey toward prosperous economic growth.

As we all do our part in rebuilding the damage caused by the Covid pandemic, there are certainly some ‘taxing’ times ahead of us. However, almost every European country has seen a rise in average salary figures, indicating we are headed in the right direction.

Of course, the research is just indicative of the average taxpayer in each country – higher earners will generally have a later tax freedom day.

In many cases, there are steps you can take to lighten your tax burden, especially on your capital investments and pensions. While we all have to pay our share of taxes, cross-border taxation is highly complex; do not risk getting it wrong or paying more than you legitimately have to. Take personalised, specialist advice on the compliant tax mitigation opportunities available in Spain and the UK – you may be surprised at how you can improve your tax situation.

David Bowern, Partner, Blevins Franks

+34 952 809 212

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All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice.

Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.

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