How much tax do we really pay
If all the taxes we pay – income, national insurance, VAT, council tax, duties – were presented in the form of a bill at the end of each year, it would be a shock. Most people are approaching ‘higher-rate’ amounts of tax without realising it.
The table below illustrates the average tax rates paid at different incomes. Although the great majority of us don’t pay income tax at the higher rate of 40%, when you add in everything else we pay in tax our average tax rates get pretty close. The average earner pays 36% in tax. Is it just me, or does this seem a lot?
Because these averages are so unexpectedly high, I’ve included some information on the assumptions I’ve used in these calculations, which are explained in more detail in the notes below.
Income Tax and National Insurance
I’ve used the standard rates and allowances applicable for the tax year 2013-14 but not adjusted for any additional allowances. In the case of pension contributions, especially for higher-rate tax-payers, these can be significant, but I left these out to keep things simple.
VAT
The first problem with calculating how much after-tax income goes on VAT is first estimating how much income is absorbed with mortgage payments. This is tricky because it layers assumption on assumption so, for this reason, I’ve shown the size of mortgage along with my estimate of mortgage payments. The second problem arises when estimating how much disposable income is spent on zero-rated items, such as food, transport etc, versus standard rated items. I assumed a quarter.
Council Tax
These are more straightforward and are similar up and down the country.
Fuel Tax
Fuel duty is nearly half the price of a litre of petrol, and then there’s VAT on top of that. I’ve assumed an annual mileage of 10,000 miles means spending £1,300 on fuel.
Other Indirect Taxes
I’ve assumed excise duties, on tobacco and alcohol, and other duties such as road tax, insurance tax, airport tax and TV license add up to £500, but left out other direct taxes such as capital gains tax and inheritance tax.
The tax we pay in all these different guises accounts for roughly 60% of the £617bn the government takes in revenue, with the remainder coming from businesses and direct charges for certain public services. The total revenue collected is 38% of national income so it’s not hard to see that we will inevitably end up paying amounts close to ‘higher-rate’ tax if that’s what the government spends. The trouble at the moment of course is that government spending is running at 42% of the national income, hence the current unpleasantness.
The bigger problem is that healthcare and pensions – the top two components of government spending – are set to rise faster than national income can keep up. Now, if everyone’s already paying ‘higher-rate’ levels of tax, it’s pretty clear that something big’s got to give.