Employees’ taxes in the UK and France
Aside from the issue of the level of tax payments, it is just worth noting in passing the incoherence of the tax system in the UK. The current marginal tax rates, expressed as a percentage of employees’ net earnings are shown in Figure 1. Certainly, it could hardly be argued that the Himalayan marginal tax rates result from years of fine tuning by Treasury masterminds who understand the strategic importance of coherent tax systems.
Indeed, if the objective were to create incoherent tax systems, then the withdrawal of the personal allowance introduced in the Finance Act 2009 would be their most notable accomplishment, since it achieves a near 75 per cent marginal tax rate in a system with a supposed top rate of tax of 45 per cent, if taxes are calculated as a percentage of value added. For £100 of additional salary above £100,000 the employee would suffer an additional £2 national insurance and £60 tax (the higher rate of income tax plus additional tax caused by the withdrawal of the personal allowance at this point) thus receiving £38 net. This creates a 62 per cent marginal tax rate. However, the employer would also pay £13.80 to the state in employer’s national insurance although this should be added to the salary increment to calculate the value added by the employee which is £100 plus the £13.80 necessary to pay national insurance. We should also take into account indirect taxes which are probably about 20-25 per cent of the net salary received: a conservative estimate would be £7.60. The total tax as a proportion of the value added by the employee is therefore: 73.2 per cent (60+2+13.8+7.6/113.8)*100. It is worth noting that, in return for the national insurance contribution, entitlement to future state pension is accrued. In the rest of this analysis we will ignore indirect taxes.
It is also worth calculating the tax burden at the margin as a percentage of the individual’s net pay. This shows the additional cost, at the margin, that has to be paid in tax over and above the amount of money that is received by the employee. As we shall see, this is especially relevant when looking at the predicament of the low paid. If the low paid receive (for example) £5 an hour but additional taxes are also £5, then the rate of tax as a percentage of the net wage received indicates the extent to which the net wage could be increased if all the taxes paid to the government were used to increase the gross wage. Clearly, depending on labour market conditions, such taxes would not necessarily be received by the wage earner.
Figure 1 shows the marginal and average tax rates as a proportion of the net wage received throughout the wage scale in both the UK and France.
Figure 1: Labour taxes as a percentage of net pay in the UK and France
The left of the chart in Figure 1shows the immediate incidence of French taxes at the rate of 82.3 per cent of the net wage at the low end of the wages scale. This causes a major barrier to employment at minimum wage levels. In the UK, a worker on minimum wage can work about 23½ hours a week with neither tax nor national insurance charges to the employer or to himself. Above those weekly hours the marginal rate moves up sharply to 67.35 per cent of the net wage. In France, the tax take as a percentage of the net wage is higher at all income levels until you get to very high wages.
Table 2 shows that, although the minimum wage in France is seemingly higher than that in the UK, the French employee’s net income is, in fact, slightly lower. The French employee, from the first euro, suffers state taxes of 82.3 per cent of net earnings, resulting in a 79 per cent higher labour cost for the employer for employees on the minimum wage. Quelle horreur! Because of the high labour costs, and the resulting pressure on competitiveness, the market has become such that most jobs at minimum wage tend to be those that can only be done locally, such as food preparation, caring and hotel work.
Table 2: Minimum wage in France and UK: the true labour costs and net hourly wages.
|Minimum wage comparisons – France vs. UK first 23 hours per week||France||UK|
|Minimum wage as at Oct 2013||€ 9.43||£6.31|
|Hours worked per week||23.40||23.40|
|Employer’s NI||€ 4.04||£0.00|
|Employee’s NI||€ 2.04||£0.00|
|Income tax||€ 0.00||£0.00|
|Net hourly wage||€ 7.39||6.31|
|Net hourly wage – £ (1€=84p)||£6.21||£6.31|
|Employer’s hourly labour cost||£11.31||£6.31|
|% higher labour cost in France||79.3%|
|% of net wage taken by the state||82.3%||0.0%|
This has important implications. The low paid employee is taking home less than his counterpart in France and yet he costs almost twice as much to employ after taking account of taxes paid by both employees and employers until such time the employee is working considerably more than half a standard working week.
UK youth unemployment has risen considerably since the minimum wage was introduced in the UK. This is not an issue that seems to concern politicians. The figures above, however, provide a number of important lessons that transcend the sterile debate on whether the minimum wage should be increased further:
- The minimum wage is higher in France and yet take-home pay is lower. Even in the UK, the debate should perhaps focus more on the tax burden on those working full-time at the minimum wage. It would be possible to increase take-home pay of the less-well-off whilst not harming employment prospects by raising wage costs.
- The gross cost of employing somebody on the minimum wage in France is almost twice as much as in the UK and the gross cost of employing somebody on the lowest wages is almost twice as much as the net wage received by the employee. This must go some way towards explaining the lamentable performance of the French labour market for young people. Again, it is worth noting that, even in the UK, we could reduce the cost of employment of those on the lowest wages.
Steve Watt is a practising Chartered Accountant and Chartered Tax Adviser at Steve Watt & Associates.