The UK has lost the top spot as one of Europe’s low-tax jurisdictions, with top earners now paying 3% more tax than the European average
Individuals earning £200,750 a year in the UK pay on average nearly £3,000 more than Europeans earning the same salary, with UK taxpayers shelling out £83,300 in tax, compared with an average of £80,600 in tax and social security contributions across European countries, according to analysis by UHY International.
These so-called middle earners are taxed on 41.5% of their income – ranking the UK the ninth highest among the 30 countries studied.
UK higher income tax rates of 40% are higher than those in France (34%), Spain (35.6%) and Poland (33.8%), while the G7 average is 40.6%. Although Ireland has some of the most competitive corporate tax rates in the EU, individuals face higher tax bills with an average 46% tax rate for higher earners.
From a tax perspective the best place to work is Russia where all taxpayers, including high earners, pay just 13% income tax.
The worst place to be a top earner is Denmark where individuals earning £1.2m pay over half of their income in tax – 53.2% in total – making it the highest tax rate in Europe, closely followed by Germany and the Netherlands.
UK taxpayers on the same salary would pay a 46.1% tax rate, less than in Ireland, Belgium or the US, but above the European average tax rate of 44.2%.
Mark Giddens, partner at UHY Hacker Young, said: ‘It will come as a surprise to see that high earners in the UK pay more in tax than in traditionally high-tax economies like France.
‘While restrictions on immigration are hitting the headlines, it remains the government’s stated intention to attract “the brightest and best” to the UK. Reducing taxes for high earners and corporates could help the UK better compete in a post-Brexit world.’
The study points out that the recent change of government leadership in the UK has raised questions over future policy on taxation of income.
During his campaign to be prime minister, Boris Johnson said that he would increase the higher rate threshold from £50,000 to £80,000, and would also raise the point at which individuals begin paying national insurance contributions (NICs). An autumn Budget is scheduled for November this year, which would be the first opportunity for the Conservative government to address tax thresholds.
Shadow chancellor John McDonnell has suggested that Labour would lower the threshold for additional rate tax from £150,000 to £80,000, which would capture more top earners in the 45% tax bracket.
UHY International estimates that increasing the higher rate threshold to this level would benefit four million, or 8%, of UK taxpayers in the short term, although a quarter of people in the UK will either become or live with a higher earner at some point in their lives.
The study highlights that high earning Western European taxpayers are still being taxed at a higher rate than peers in BRIC countries - Brazil, India and China - and developing economies.
The BRC average tax rate on those earning $1.5m is 29.8%, while those on $250,000 lose 27% in tax compared with the G7 average of 40.6%.
G7 countries including France, Canada, the US and UK, have all recently taken measures to reduce or withdraw top rate tax bands imposed following the financial crisis.
In 2014, for example, France’s rate of 45.8% on a £200,000 income, was substantially higher than the current rate of 40% and it scrapped the 75% marginal rate on incomes above €1m (£888,000).
Rick David, chairman of UHY International, said: ‘As developing countries mature and their middle classes expand, governments may decide to increase their marginal rates of tax on higher earners to meet greater demand for public services. This is beginning to happen in Asian countries, such as India and China, which have gradually been taxing higher incomes more and lower incomes less.
‘Over time, as the population of developing countries becomes wealthier, this tax disparity between the G7 and BRIC economies could reduce.’
UHY studied tax data in 30 countries focusing on the ‘take home pay’ for low, middle and high income workers, taking into account personal taxes and social security contributions. The calculations are based on a single, unmarried taxpayer with no children.
By Pat Sweet, additional reporting Sara White