Labour has pledged that people earnings over £80,000 will have to pay more income tax, raising £5.4bn to spend on other priorities such as the NHS. But independent tax experts warn that the well-off already pay a very large proportion of total income tax, with the top 1% of earners now accounting for more than a third of all income tax paid. Almost half the population don’t pay any income tax at all.
So who’s right? Are Britain’s high earners taxed too much, or too little? I carried out an exercise this week to compare how much the same well-paid workers in the US, Germany, the Netherlands and Ireland pay in tax in comparison with England and Wales (Scotland has slightly different tax rates). I decided to ignore France, because I’ve tried and failed in the past to make any sense of its profoundly complex personal tax system.
It is also the case that any comparison of personal tax rates from one country to the next soon turns into a fiscal spaghetti of differential allowances, codes, federal, state, church and local charges. And moving exchange rates change everything, too. So don’t treat the figures too precisely.
Let’s start with someone on £80,000 in England and Wales. They are left with £54,935 after tax (assuming they are on the full 1250L tax code). In the US, £80,000 is $103,495, and using one of the popular take home pay calculators, it works out they are left with £61,429 after tax. So American high earners evidently pay much less in the way of payroll taxes than their English equivalents.
The conclusion? Yes, British high earners really do pay significantly less income tax than their European counterparts – with the £80,000 earner taking home as much as £8,000 more than their Dutch equivalent, and £4,000 to £5,000 more than the Germans or Irish.
It’s a very similar picture for people earning £125,000 a year. The Briton takes home £5,000 to £8,000 more than nearby Europeans, though noticeably less than the Americans.
It’s a very similar picture for people earning £125,000 a year. The Brit takes home £5,000 to £8,000 more than nearby Europeans, though noticeably less than the Americans.
Should Jeremy Corbyn win the election and raise income taxes as promised, someone on £150,000 will have to pay £5,375 a year more than now. So in effect it will just bring tax here into line with Europe. It’s not a madly unfair tax grab.
But there’s another dimension to consider. What do high earners get for the taxes they pay? In the US, it’s relatively simple – taxes are lower, but there is no NHS. The average cost of a family health insurance plan in the US is an extraordinary $20,000 a year, with employers typically bearing only 70% of the cost. Never underestimate just how much we all save having the NHS. Americans also often pay much higher property/council tax too; $7,000 a year, for example, on a $300,000 valued home in New Jersey.
In Germany, high earners pay more tax, but receive much better benefits. A high earner in Germany who is made unemployed can claim 60% of their former income for up to two years, up to a maximum of €6,500 a month (£5,570). Compare that to the pitifully low maximum £73.10 a week jobseekers allowance paid here.
Then look at pensions. The German on £80,000 a year pays around £21,000 in tax – but around £7,000 of that goes towards their state pension. If they make full lifetime contributions, they retire with a state pension far in excess of anything paid in the UK.
By all means let’s raise taxes on the high paid to German levels. But a benefits and pension system that makes much more of a nod to the level of contributions paid will be a far more engaging and less confiscatory solution.