Are UK Workers Over-Taxed Compared to the World?

When we look at our paycheques, many of us often wonder how much tax we’re paying and whether it’s more than workers in other countries. Tax Policy Associates have some interesting insights on how the UK stacks up against the rest of the world when it comes to taxes on wages.

Understanding the “Tax Wedge”

To compare tax rates internationally, experts use the “tax wedge”. Simply put, it’s the total amount of taxes paid by a worker and their employer, expressed as a percentage of the employee’s total wages. This includes income tax and national insurance or its equivalent in other countries.

For instance, if you earn £100, but after tax and other deductions you get £75, then the tax wedge is 25%.

Why is this helpful? Because it gives a fair comparison of how much tax workers actually pay in different countries.

So, how does the UK fare?

Well, according to data from the Organisation for Economic Co-operation and Development (OECD), the UK’s tax wedge is relatively low compared to many other countries. That might come as a surprise to some!

However, it’s worth noting that countries with higher tax wedges often have more expansive welfare systems. In simple terms, they may have better public services or more generous social security benefits. Think of it this way: generally, you get services based on what you pay in taxes.

An interesting fact to highlight: there isn’t any country where workers pay less tax than in the UK but has higher government spending.

What About VAT?

Now, let’s talk about the Value Added Tax (VAT). At first glance, the UK’s standard VAT rate seems pretty average. But there’s a twist.

For starters, the USA doesn’t have a VAT system. Instead, many states have sales taxes, which are different in many ways. For example, while VAT is generally applied to most goods and services, state sales taxes in the USA often have a lower rate (around 5%) and may not cover as many items.

But a country’s standard VAT rate doesn’t tell the full story. Some nations might apply their standard VAT rate to almost every item, while others might have lots of exceptions. Interestingly, when comparing the VAT rate to how much tax it generates relative to a country’s economy, the UK seems to collect slightly less VAT than one might expect given its rate.

Why is that? Some experts, like Rita de la Feria, a leading academic in the field, believe it’s because the UK has quite a few exemptions or items taxed at lower rates, even though overall VAT compliance in the UK is commendable.

The Bottom Line

After all that number-crunching, what’s the verdict?

Contrary to what some may believe, there’s no solid evidence to suggest that the average Brit is paying more tax than their counterparts in other countries, at least not by international standards.