How the Government Takes Over Half of Your Earnings: A Clear Breakdown of Taxes on UK Income

Many people in the UK are aware that income tax deductions take a chunk out of their wage slip, but the full scale of taxation on earnings is often surprising. Once you consider income tax, national insurance, council tax, VAT on purchases, car tax, and fuel duty, the government’s share of your income can exceed half. This article will illustrate how much people in different income brackets contribute, showcasing the significant burden that taxes can impose.

The Many Layers of UK Taxation

When most people think about taxes, income tax often comes to mind. However, a range of other taxes apply to your earnings, each impacting your income and spending. Here’s a breakdown of the key taxes that erode your take-home pay:

1. Income Tax: A tax on your earnings, applied at different rates depending on your income.
2. National Insurance Contributions (NICs): A deduction to fund services like healthcare and pensions.
3. VAT (Value Added Tax): An indirect 20% tax on most goods and services.
4. Council Tax: A local tax based on property value, funding services like waste collection and emergency services.
5. Vehicle Excise Duty (Car Tax): An annual tax on cars, calculated based on engine size and emissions.
6. Fuel Duty: A tax on petrol and diesel that significantly impacts drivers.
7. Employer’s National Insurance: Paid directly by employers based on your earnings but indirectly affects your overall cost of employment.
8. Other Taxes: Including Insurance Premium Tax on car insurance and alcohol/tobacco duties.

Using three individuals as examples, let’s see how these taxes accumulate across various income levels.

Case Studies: Tax Breakdown for Three Income Levels

Scenario 1: Lucy – The Urban Commuter

Annual Earnings: £36,000

Lucy is a 28-year-old professional working in London. She lives in a small flat (Band C for council tax), commutes using public transport, and has a modest lifestyle with occasional dining out and one short-haul and one long-haul flights each year.  She likes the occasional drink and has house insurance that costs £350 per year.  She spends the remaining monies on food, bills and clothes etc.

Lucy’s Total Taxes:

• Income Tax: £4,686
• National Insurance: £2,811.60
• Council Tax: £1,500 (Band C)
• VAT on disposable income: £4,000 (estimated based on average spending)
• Fuel Duty: £0 (uses public transport only)
• Insurance Premium Tax: £42
• Alcohol Duty: £59.07

Airport Duty Taxes:

• Short-Haul Return Flight : £13
• Long-Haul return flight : £80

Employer’s National Insurance:

• £4,035 (new rate of 15% on income above £9,100)

Total Tax Contribution:

• Employee Tax: £13,098.67 + Employer NIC: £4,035 + Airport Duty: £93 (short and long-haul flights)

Total Tax Paid: £17,226.67

Percentage of Total Tax to Income:$47.85\%$

Despite her moderate income, Lucy pays nearly 48% of her income in taxes, even without a car or fuel expenses.

Scenario 2: Ben – The Family Man

Annual Earnings: £50,000

Ben is a 40-year-old graphic designer and father of two. He lives in a Band D home in Manchester, owns a mid-size car and drives around 10,000 miles per year.  He goes on a couple of family holidays each year, including one short and one long-haul trip.  He also spends his remaining monies on food clothes, bills, going out etc

Ben’s Total Taxes:

• Income Tax: £7,486
• National Insurance: £4,851.60
• Council Tax: £2,000 (Band D)
• Car Tax: £150 (1.6-liter car)
• VAT on disposable income spend: £5,203.67
• Fuel Duty: £550.68 (driving for errands and school runs)
• Insurance Premium Tax: £42
• Alcohol Duty: £59.07

Airport Duty Taxes:

• Short-Haul Return Flight: £13
• Long-Haul Return Flight: £80

Employer’s National Insurance:

• £6,135

Total Tax Contribution:

• Employee Tax: £20,202.02 + Employer NIC: £6,135 + Airport Duty: £93

Total Tax Paid: £26,430.02

Percentage of Income Paid in Tax: 5$2.86\%$

With an income of £50,000, Ben pays over 52% in taxes due to multiple responsibilities and expenses.

Scenario 3: Sarah – The High Earner

Annual Earnings: £100,000

Sarah is a 45-year-old consultant and frequent traveler who lives in an upscale property (Band G) in Surrey. She owns a luxury vehicle, takes frequent business and leisure flights, and has higher spending overall.

Sarah’s Total Taxes:

• Income Tax: £27,432
• National Insurance: £5,518.60
• Council Tax: £3,500 (Band G)
• Car Tax: £395 (3-liter luxury vehicle)
• VAT on disposable income spend: £10,609.07
• Fuel Duty: £550.68
• Insurance Premium Tax: £42
• Alcohol Duty: £59.07

Airport Duty Taxes:

• Short-Haul Return Flight: £13
• Long-Haul Return Flight: £80

Employer’s National Insurance:

• £13,635

Total Tax Contribution:

• Employee Tax: £47,106.42 + Employer NIC: £13,635 + Airport Duty: £93

Total Tax Paid: £60,834.42

Percentage of Total Paid in Tax: $60.83\%$

At her income level, Sarah ends up paying nearly 61% of her earnings in various taxes due to her high lifestyle costs and higher tax brackets.

What These Case Studies Show

These examples illustrate that as income rises, tax contributions increase—not just through income tax but also through indirect taxes, council taxes, and employer contributions. Here are key points to consider:

1. Indirect Taxes Impact Everyone: Taxes like VAT, council tax, and fuel duty apply across the board, affecting everyone regardless of income.
2. Employer NICs Add to the Burden: While not directly visible on wage slips, these contributions indirectly increase the cost of employment, which can affect income and benefits in subtle ways.
3. Higher Incomes Lead to Higher Taxation: As seen in Sarah’s case, higher incomes are taxed significantly more, not only through income tax brackets but due to lifestyle taxes on expenses and property.

Conclusion: Get a grip on your finances and have a financial plan

For many UK residents, from middle-income earners to high earners, between 50% and 60% of income can go toward taxes when all sources are considered. Understanding the impact of these taxes is vital for making informed financial decisions on income, savings, and spending. While taxes fund essential public services, being aware of the comprehensive tax burden can help individuals plan effectively for the future.

Our advice it to build a budget and stick to it.  Hopefully, this budget will leave some space for saving and investing into your future.  Without a plan yon will easily find yourself drifting financially and you probably won’t achieve your goals.  This is one of the major reasons that only 6% of people become independently wealthy by retirement age.

However, we may need to spare a thought for these individuals too as they will then have to give up another 40% of any assets over £500,000 in inheritance tax!!