New report compares tax paid by UK families with that in other countries
A new report highlights that a British family with an average wage in 2016 is likely to have paid over £3000 in income tax whereas a comparable family in France and Germany would have had no tax to pay and an American family would have had no Federal Income tax to pay. – a major new report by Beighton, Draper and Pearson reveals.
Moreover the British family is likely to have been paying as much as three times as much income tax as a taxpayer with a similar standard of living but without family responsibilities. Also, their “effective marginal tax rate” would have been 73% which means that they have only been able to keep 27p ( less than 10p if in rented accommodation) from any extra income earned. Almost every family married, single parents, one earners and two earners are all paying more than similar families in other countries although single earners were the worst affected.
The report argues that there is urgent need to consider the impact on families of independent taxation. Is the system that was introduced in 1990 still “fit for purpose”, the authors ask?
A new report by “Tax and the Family” experts and published by CARE in November 2017 compares the tax burden in 2016 on UK families with that in other OECD countries. Using OECD data and definitions it looks first at the overall tax burden –in the case of the UK this means income tax plus employee national insurance contributions, less tax credits and child benefit.
Overall tax burden
Using this wide definition of tax the report reveals that a one earner married couple with two children earning £36,571 (an ‘average wage” in 2016 as measured by the OECD) paid 20% more than the OECD average – 17.8% – whereas the average was 14.8%.
A single parent with two children and the same income paid 18.4% which was also 20% more than the OECD average.
A one-earner couple without children paid 22.7% (couples without children do not, of course, get child benefit or the child tax credit) which was almost the same as the OECD average. The income tax bill for a single adult was 23.3% which was almost 10% less than the OECD average.
It is not however the case that at all income points the overall tax burden even on one-earner families is higher that that in other countries. In the UK – the all employee median earnings in 2016 were. £28,758. Using unpublished but official OECD data, the authors worked out the figures for five income points ranging from 50% to 150% of the OECD “average wage” .i.e. in UK terms from £18,285 to £54,856.
At 50% of the OECD average wage a one-earner married couple with two children fares well – at this income level in 2016 tax credits and child benefit cancel out income tax and national insurance. However, the picture changes as income rises. At £27,428 (75% of the OECD average wage) the net tax burden is below the international averages but at £36,571 (average wage) it is 20% above and at £ 54586 it is 16% higher. The picture is similar for a single parent family with two children.
At all five income points the tax burden on a single adult without children is less than the OECD average and significantly less than the EU average. At all five income points a married couple without children has a bigger burden than the OECD average but not significantly so.
OECD only has data for two earner couples at two income points - £48,639 and £61,074 – these income points are 1.33% and 1.67% respectively of the “average wage”. At these two income points the UK tax burden, as defined, is actually less than the OECD average.
Tax paid by families compared with that paid by singles without children
At lower levels of income the tax burden (net of tax credits and child benefit) is significantly less than that on a single adult without children. At higher level it is still less but at £55,000 there is virtually no difference.
Income Tax on its own
The figures just quoted take account benefits. The report contains figures for income tax on its own compares the UK with the OECD average and also with four other countries.
One of the difficulties in comparing tax burdens is to decide what to include as income tax . OECD treats tax credits as part of the income tax system. In the UK tax credits are income tax are separate. Tax credits are not tax offsets – they are not linked to the claimants income tax liability and are generally based on the previous year’s household income. Income tax is based on an individual’s current year income.
Looking at UK income tax on its own and comparing this with the OECD average as calculated, the report finds that at 100% of the OECD average wage (i.e. £36,561) the UK income tax burden for a one –earner married couple with two children )is 25% higher than the OECD average. By contrast, the UK income tax burden on a single adult is 14% less.
The Report shows that at 50% of the OECD average wage (i.e.£18,285) the UK income tax burden for a single parent with two children is almost double the international averages. For a one-earner married couple with two children it is slightly more than double. Even at the 150% income point (£54,857), the UK income tax burden is still 25% greater than the OECD average for a one-earner married couple with two children, and 13% greater for a single person with two children. The UK income tax burden on one-earner families is greater than the OECD and EU (22) averages at all five income points.
In contrast, the UK income tax burden on single people without children is lower than the OECD and EU(22) averages at all five income points. The picture is different for one-earner married couples without children in the UK, who face greater income tax burdens than the international averages at the 50%, 75% and 150% income points.
The international averages hide a difference between some of the larger OECD countries, where income tax burdens are significantly less than in the UK, and other countries (such as the Scandinavian and Australasian), where income tax burdens are comparatively high.
The Report compares the income tax paid by a married couple with two children as a percentage of income in the UK with the income tax burden in France, Germany and the US. At £36,571 the UK family pays 70% more than the French family, more than twice as much as the US family, and an extraordinary 15 times as much as the German family (see chart below).
Income Tax as percentage of gross wages 2016. One-earner married couple with two children
Percentage of OECD average wage
Source: Chart 6 of the Report
Across a wide range UK two-earner families also bear a heavier income tax burden than their counterparts in France, Germany and the USA. A two earner family with two children in France pays less than 0.1% on an income of E 38,049 . At lower incomes they pay no income tax at all. In Germany there is only 0.9% to pay on an income of E 47,809 and none at lower incomes. In the USA a two earner couple with two children and an income of $ 52,543 pays only 1.2% Federal income tax.
In the UK a two earner family with two children and income split 60:40 paid 4% on a joint income of £27,000, 8% on a joint income of £36,000, 10% on joint income of £45,000 and 12% on a joint income of £55,000. A two earner family with two children in France pays less than 0.1% on an income of E 38,049 . At lower incomes they pay no income tax at all. In Germany there is only 0.9% to pay on an income of E 47,809 and none at lower incomes. In the USA a two earner couple with two children and an income of $ 52,543 pays only 1.2% Federal income tax. In the UK a two earner family with two children split 60:40 paid in 2016 4% on a joint income of £27,000, 8% on a joint income of £36,000, 10% on joint income of £45,000 and 12% on a joint income of £55,000
The evidence is compelling that one-earner families bear a heavier share of the tax burden in the UK than in other countries, particularly when income tax is looked at on its own. This is true both for single parents and for one-earner married couples. Two-earner families also bear a heavy income tax burden, although their overall tax rates are less than the international average.
The amount of tax that families pay bears little relationship to how well off they are. They pay more tax than other households that are much better off. Some poorer families even pay higher rate tax (see separate page of website).
This problem, which has been ignored by successive Chancellors, is a serious one, and needs to be tackled. Tax liabilities should be brought closer into line with household incomes.
The problems the report identifies arise because UK income tax is based on individual income and, unlike in most other developed countries, takes almost no account of family responsibilities. The French, German and US systems all have a form of joint taxation reflecting the reality of how people live. This results in lower tax liabilities for the majority of families. In the UK benefits, including tax credits and the universal credit, are based on households; income tax disregards the family with the result that most UK families bear a disproportionate share of the tax burden.
In 2015/16 (latest year for which there are figures) the report highlights that when income is measured on a household basis a one-earner couple with two children and an average income would have needed more than twice the gross income of a single person to enjoy an the same standard of living as a single person, and would have paid more than three times the amount of income tax, including some paid at the higher rate.
The report argues that the time has come to take a new look at independent taxation. A way needs to be found of taking account of household income within the context of individual taxation. This has been done – to the disadvantage of one-earner couples - with the High Income Child Benefit Charge. If it can be done when this disadvantages families it should surely be done also when it would be to their advantage and result in a fairer distribution of the tax burden.
The introduction of the transferable allowance for married couples and civil partners shows that it is possible to have focused allowances within a system of independent taxation. This was a step in the right direction. It is important that this allowance be enhanced.
Until a more radical reform of personal taxation can be undertaken, the Government should build on this precedent to bring income tax liabilities closer into line with the distribution of incomes. One option which should be considered, without any additional cost, would be to postpone the planned increases in the personal allowance for all taxpayers and instead increase that allowance more significantly only for taxpayers with dependent children.
These changes on their own do not go to the heart of the problem the report identifies. The authors recognise that there are many other important issues facing the country but the time has come, they say, to consider the impact on families of independent taxation. The system which was introduced in 1990, and which has its origins in the 1980s, needs to be re evaluated. Is it still ‘fit for purpose”, they ask?
 The Marriage Allowance allows the transfer of 10% of the personal allowance to a husband, wife or civil partner. The allowance is only available to couples where the higher earner is a basic rate taxpayer, and is only beneficial if the lower earner earns less than the personal allowance (£11,000 in 2016-17).