Tax, in all of its myriad and often-changing forms, is unavoidable if we wish to make our contribution to society.
But just how much tax does an individual pay in a lifetime?
As George Osborne prepares to deliver his Budget on Wednesday, Telegraph Money provides an answer for one imaginary taxpayer who we have created to be representative of our readership.
The taxes we have included, and the assumptions we have made, are set out below.
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Our assumptions were partly informed by anonymous information provided by readers who used the online budget calculator produced by Telegraph Money and accountants Blick Rothenberg at the time of last year’s Budget.
Our analysis is not intended to arrive at an “average” tax bill, as our imaginary taxpayer will be wealthier than most – although by no means extremely wealthy.
All of the tax rules and rates used are for the 2016‑17 tax year, or, in the case of taxes that are to be phased in, such as the reduction in buy-to-let tax relief, the ultimate rates that will apply.
The lifetime totals
The monetary figures are high because we are looking up to 60years ahead. If you had £100,000 in 1956 (60 years ago), it would be the equivalent of more than £2mtoday.
All figures relate to an individual, so incomes and gains that would be split between a couple (arising, for example, from jointly owned property) have been halved, including the inheritance tax bill.
All income (including salary, dividends, property appreciation and other capital gains): £8,617,227
All tax (full list below): £3,571,986
Effective rate of tax: 41.4pc
It maybe best no to think about it too much, but this could be the total amount you end up paying...
Posted by Telegraph Money and Investing onSaturday, March 12, 2016
Taxes included
- Income tax (including on retirement income and buy-to-let income)
- National Insurance
- Inheritance tax
- VAT
- Capital gains tax
- Dividend tax
- Stamp duty
- Council tax
- Insurance premium tax
- Fuel tax
- Air passenger duty
- Alcohol duty
- Car tax
Our assumptions
One half of our couple is a successful, married professional who starts work today on a graduate salary of £28,000 at the age of 21, reaches the current threshold for higher-rate tax at 30 and sees earnings peak at just over £115,000 at the age of 50, when wage growth stops.
The couple retire at 67 and live until 80. They have two children. Child tax credit has not been considered, so a small amount could be knocked off the total tax bill for that.
They buy their first property at 33, move to a larger home at 39 and downsize at the age of 60. At 55 they purchase a buy-to-let property, which is sold on their retirement at 67.
Our earner invests tax efficiently, contributing 8pc of income to a pension via salary sacrifice, with 4pc added by the employer, and 10pc of take-home pay invested in a stocks and shares Isa, which is assumed to return 4.5pc a year.
The couple spend around 45pc of their after-tax income on goods and services thatattract 20pc VAT, another 2pc on services that incur 5pc VAT, such as energy, and 32pc on goods and services that attract noVAT.
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The rest is saved, spent on holidays, put towards mortgage overpayments or used on expenditure not accounted for otherwise, such as their children’s university fees.
The proportions stay the same throughout their life, as their lifestyle improves with income.
Reasonable assumptions for fuel and alcohol consumption have been made, and the family take one long-haul and one short-haul holiday ayear.
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Property is assumed to appreciate at 6pc annually and their pension assets at 4pc annually.
At retirement, the earner’s Isa assets and the proceeds of the couple’s buy-to-let property are invested to generate a 3pc annual income and 2pc capital growth.
They buy an annuity with their pension pot. At death the children inherit their parents’ Isa, the invested proceeds of the sold buy-to-let and their downsized house. Inflation is assumed throughout to be 2pc (the Bank of England’s targetrate).
1. Income tax and National Insurance: £1,533,152
Percentage of all lifetime income and gains: 17.8pc
Percentage of total tax bill: 49.2pc
Our earning spouse starts at an effective rate of 18.1pc of salary for income tax and National Insurance combined, after pension contributions are taken into account.
The rate rises steadily at around half a percentage point a year, peaking at 33.2pc at the age of 50. At the earner’s salary peak, take-home pay after tax and pension contributions is just under £68,000.
The couple also pay income tax on their buy-to-let rental income (using the 2020‑21 rules), which leaves them with a small profit, although they benefit significantly from property price growth.
The entire £1m lifetime pension allowance is used but not exceeded, and the couple pay income tax on their £40,000-a-year annuity.
2. Council tax: £83,071
Percentage of all lifetime income and gains: 1pc
Percentage of total tax bill: 2.3pc
Council tax on their main residences is towards the higher end of the spectrum and rises at 4pc annually, including the additional 2pc annual rise that councils are now allowed to enforce.
3. Capital gains tax and dividend tax: £140,154/£45,377
Percentage of all lifetime income and gains: 2.1pc
Percentage of total tax bill: 5.2pc
This figure is greatly reduced by the use of a stocks and shares Isa, meaning the only tax paid on growth and dividends is when the couple invest the profits on their buy-to-let property. If the money had been invested outside an Isa, the percentage would probably double.
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4. Stamp duty: £107,500
Percentage of all lifetime income and gains: 1.2pc
Percentage of total tax bill: 3pc
The buy-to-let property incurs the new surcharge of three percentage points on stamp duty on second homes, adding 50pc to the couple’s total lifetime stamp duty bill.
5. Inheritance tax: £1,211,882
Percentage of all lifetime income and gains: 14pc
Percentage of total tax bill: 33.9pc
The inheritance tax bill is included here, as it will be paid by the couple’s estate. This bill is so large because their downsized property is worth a significant amount at the time they die and because their ability to live on their investment income and annuity means that their assets are left intact. The Isa shields a large proportion of their capital growth and dividends from tax, but cannot escape IHT when the balance is passed to their children.
6. VAT: £323,599
Percentage of all lifetime income and gains: 3.8pc
Percentage of total tax bill: 9.1pc
VAT is paid at 20pc on a large number of goods and services, including cars, food served in restaurants and clothes. As with most people, our couple’s expenditure on goods that incur VAT (which applies to most “luxury” items) goes up with their income. The figure of 3.8pc would vary significantly according to how frugal an individual is as their income increases.
7. Fuel duty, insurance premium tax, air passenger duty, alcohol duty and car tax: £127,252
Percentage of all lifetime income and gains: 1.5pc
Percentage of total tax bill: 3.6pc
Anyone who has bought an air ticket recently knows that taxes account for a large part of the price. The same is true of alcohol, fuel and tobacco. Drivers need to pay their car tax, while insurance premium tax of 9.5pc is levied on many policies, generating billions of pounds in revenue for the public purse each year.
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Are we taxed more highly today than inthe past?
According to Martin Daunton, emeritus professor of economics at the University of Cambridge, taxes before the First World War amounted to 9pc or 10pc of the country’s economic output, increasing to 23pc during the war itself and around 35pc following the Second World War.
“It has sort of jogged about there ever since – it’s a bit higher than that now, but it’s been within the same sort of ballpark since the war and is similar to most countries in Europe,” said Prof Daunton.
Apart from the transition from being an industrial nation, Prof Daunton said, it wasn’t “just a demand from working people for better public services” that drove up tax but also “a realisation that in a modern society you have got to have them [services]”.
He said that greater welfare spending helped to mitigate the Depression of the Thirties, which acted to legitimise the higher level of taxation.
For Prof Daunton, the most striking aspect of today’s tax system isn’t the total amount that it raises but its complexity, along with changes in “the assumptions of what it is supposed to do for society”.
He suggested that the change towards a less transparent system “helps, rather paradoxically perhaps, to make the tax regime more acceptable than it had been.
“I don’t think people quite realise what’s happening to them until the last minute – that’s the big change from the past, where the aim was to keep the system transparent so people knew what washappening.
“Now it’s more to do with stealth taxes, and complications where people don’t realise quite what’s happening. There’s no way to stand back and make sense of it as a whole; it’s too complicated, which isdangerous.”
Jonathan Isaby, chief executive of the TaxPayers’ Alliance, agreed that streamlining the tax system should be something to work towards.
He said: “An individual’s National Insurance contributions are effectively just another income tax, and a stealthy one at that. It would be a very good move towards transparency and simplicity to merge National Insurance with income tax.”
Mr Isaby also argued that stamp duty acted “to gum up the housing market by making it more costly to move and downsize” and that the second home surcharge “will reduce the number of rental properties on the market, pushing rents up”.
