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UK Tax compared to US Tax

UK Tax compared to US Tax

Old Dec 12th 2007, 7:10 am
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Default UK Tax compared to US Tax

As part of another thread, I made the comment that I paid less tax here than back in UK. Another member commented that they paid more taxes here than in UK, suggesting California state tax was partly to blame. So I gave the following details, hoping to get some feedback - but that thread is currently developing into a war of words on healthcare - so I figured I would spin this off as a new topic. I'm just curious what the current state of taxation is in UK.

========== Original Post ===============
Looking up the actual figures now: Marginal Fed tax rate on taxable income over $74k was 28% in 2006. Marginal CA State tax rate on taxable income over 43k was 9.3%. So the MARGINAL tax I'm paying on every taxable income dollar over $74k is about 37%. Since my taxable income is reduced significantly by mortgage interest, 401k contributions, etc, and since the marginal rate only applies to the amounts over the threshhold, my actual, effective tax paid last year was (looking up my turbo-tax records now....) 18% Federal and 6.6% State.

So my complete 'tax paid divided by total income earned' was about 24.6%. To me, that's the only figure you can compare - actual tax paid as a fraction of total income. The "California Penalty" is 6.6%. One good raise and you covered it.
===================================

I think the above is a reasonable analysis, and I'd be interested in comparative info from UK. A quick google suggests marginal tax rate is 40% on income above 34k pounds - so more than the combined 37% I'm paying here, and worse since you can't deduct mortgage interest.

But you also have to add FICA in the US (medicare tax, about 7.5% on up to $97k of income) and, in CA, SDI (state Disability Insurance) of about 1%. So my 37% marginal becomes about 45% marginal when you add these two; probably much closer to UK 40% now if you allow for mortgage interest deduction. But are there other Income Taxes in UK other than the basic 40%? NIC?

And if you really want to compare taxes overall, you have to compare sales tax (8% in CA; what is VAT in UK? - 17%?), and I guess you could really ask why cars are so expensive in UK - almost double the price here. I've never figured that out. And gasoline ... I guess there is a tax there somewhere causing it to be more than double.

As I said, I didn't come here for tax reasons and wouldn't go back because of them, I'm just curious!
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Old Dec 12th 2007, 1:12 pm
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Default Re: UK Tax compared to US Tax

Originally Posted by Steerpike View Post
As part of another thread, I made the comment that I paid less tax here than back in UK. Another member commented that they paid more taxes here than in UK, suggesting California state tax was partly to blame. So I gave the following details, hoping to get some feedback - but that thread is currently developing into a war of words on healthcare - so I figured I would spin this off as a new topic. I'm just curious what the current state of taxation is in UK.

========== Original Post ===============
Looking up the actual figures now: Marginal Fed tax rate on taxable income over $74k was 28% in 2006. Marginal CA State tax rate on taxable income over 43k was 9.3%. So the MARGINAL tax I'm paying on every taxable income dollar over $74k is about 37%. Since my taxable income is reduced significantly by mortgage interest, 401k contributions, etc, and since the marginal rate only applies to the amounts over the threshhold, my actual, effective tax paid last year was (looking up my turbo-tax records now....) 18% Federal and 6.6% State.

So my complete 'tax paid divided by total income earned' was about 24.6%. To me, that's the only figure you can compare - actual tax paid as a fraction of total income. The "California Penalty" is 6.6%. One good raise and you covered it.
===================================

I think the above is a reasonable analysis, and I'd be interested in comparative info from UK. A quick google suggests marginal tax rate is 40% on income above 34k pounds - so more than the combined 37% I'm paying here, and worse since you can't deduct mortgage interest.

But you also have to add FICA in the US (medicare tax, about 7.5% on up to $97k of income) and, in CA, SDI (state Disability Insurance) of about 1%. So my 37% marginal becomes about 45% marginal when you add these two; probably much closer to UK 40% now if you allow for mortgage interest deduction. But are there other Income Taxes in UK other than the basic 40%? NIC?

And if you really want to compare taxes overall, you have to compare sales tax (8% in CA; what is VAT in UK? - 17%?), and I guess you could really ask why cars are so expensive in UK - almost double the price here. I've never figured that out. And gasoline ... I guess there is a tax there somewhere causing it to be more than double.

As I said, I didn't come here for tax reasons and wouldn't go back because of them, I'm just curious!
OK I don't know.... does the UK tax include a pension?

Because part of the social security tax is for "pension" after you're 65.

I think (for income tax) I'd take taxes actually paid including soc sec ($ amount) / salary = percentage actually paid.... maybe that's what you did.

Do the same for UK (including anything paid towards pension fund).

That'd give actual taxation figures.

To be fair, I suppose you could include healthcare costs - while they're not actually a tax here, it is in the UK, so adding in would give a fairer comparison.

If you have records, and can find the amounts you've spent on goods subject to sales tax, you could figure out the amounts - add that into taxes paid at 8% / 17%.

Interesting question - I suspect how much more taxes are paid will vary a lot by person, and their individual situation.
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Old Dec 12th 2007, 2:17 pm
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Default Re: UK Tax compared to US Tax

I believe National Insurance payments go towards your pension in the UK. Not sure if that's being including in the tax calculations here or not but I know I paid a hefty amount of National Insurance back in the UK as well as taxes despite earning bugger all.
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Old Dec 12th 2007, 4:49 pm
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Default Re: UK Tax compared to US Tax

I'm not sure it's meaningful to compare. Here's one example. The US allows deduction of mortgage interest, the UK does not. This may reduce one's tax burden, but that tax deduction likely has unintended consequences:- it can help push up house prices as it means that people can "afford" to borrow more given the tax deduction. Another example is healthcare, of course.
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Old Dec 12th 2007, 4:54 pm
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Default Re: UK Tax compared to US Tax

You added medical insurance to the tax? because it might as well be...
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Old Dec 12th 2007, 5:02 pm
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Default Re: UK Tax compared to US Tax

Originally Posted by Bob View Post
You added medical insurance to the tax? because it might as well be...
Yeah, and the Medicare deduction... 12.3 % in my case... (and I'm never going to collect on it...)
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Old Dec 12th 2007, 5:15 pm
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Default Re: UK Tax compared to US Tax

Originally Posted by Elvira View Post
Yeah, and the Medicare deduction... 12.3 % in my case... (and I'm never going to collect on it...)
There is nothing to "collect" on. You are paying for the older/disabled people who are on Medicare now.

If you stay here and are old enough to be on Medicare, then the younger generation will be paying for you.
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Old Dec 12th 2007, 5:18 pm
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Default Re: UK Tax compared to US Tax

Originally Posted by Mallory View Post
There is nothing to "collect" on. You are paying for the older/disabled people who are on Medicare now.

If you stay here and are old enough to be on Medicare, then the younger generation will be paying for you.
I know, I know... But since I won't be here to benefit it is just another tax to me.
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Old Dec 12th 2007, 5:18 pm
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Default Re: UK Tax compared to US Tax

Originally Posted by Mallory View Post
There is nothing to "collect" on. You are paying for the older/disabled people who are on Medicare now.

If you stay here and are old enough to be on Medicare, then the younger generation will be paying for you.
originally you were paying for your generation, but whent he old farts kept living they dipped into our contributions, and when we will be around to collect the kitty will be empty if there is a kitty still around by then.
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Old Dec 12th 2007, 5:29 pm
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Default Re: UK Tax compared to US Tax

I only worked a couple of years in England before coming here, and have no records at this point.

On the simple level, it could be, (Federal Income Tax + FICA + State Income Tax + other State Taxes ) / Salary, where Salary is the absolute total amount earned (and not Adjusted Gross Income, which is what the tax calcs use - AGI has already had 401k, etc subtracted. The "Salaray" amount never shows up on any tax form, only on your W2).

Adding in voluntary retirement is a valid idea but very complex. I choose to pay the absolute maximum into my 401k (15k/year) but that's a choice. Then what about employer match to 401k - that would have to be income I guess, to be fair to the calculation. I'm assuming (though could be wrong) that UK 'National Insurance' is a pretty basic offering; perhaps along the lines of US Social Security - not something you'd want to have to survive on? What ARE you supposed to do in the UK for retirement? Maybe N.I. is a comfortable package and you don't have to worry about anything more?

Considering medical is also a valid idea, but again very complex. My company subsidize my medical almost 100%; I checked my last paystub and I only had to contribute $20 or so. But yes, throwing any premiums you have to pay into the calc is valid I think.

I think that's it for the 'income tax' side of things.

For other taxes, there is property tax here (homeowners only); is the 'poll tax' still alive there? Sales tax here, VAT there.

Then there's hidden taxes - stuff that costs more due to government policies, etc. Cars and gasoline come to mind as the most obvious.

But perhaps the biggest factor of all that makes the 'tax' issue secondary is "how much you can make" in the two places. It's easy to get hung up on having to pay 'x' more here / there for this or that, but those things may or may not be offset by the total income you make.

I came here because as a programmer in the UK, the pay was pitiful back in the 80s, and it was hard to find a satisfying job in a good environment. I went from 9,000 pounds UK to 30,000 dollars in the US back in 83; for me there was no comparison. Even after factoring in medical, state tax, property tax, etc, I still came out way ahead so nothing to complain about.

The situation could be very different for teachers, nurses, etc - jobs that are possibly not well paid here (which is a crime, but that's another story).

Last edited by Steerpike; Dec 12th 2007 at 5:34 pm.
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Old Dec 12th 2007, 5:31 pm
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Default Re: UK Tax compared to US Tax

Originally Posted by Steerpike View Post
I only worked a couple of years in England before coming here, and have no records at this point.

On the simple level, it could be, (Federal Income Tax + FICA + State Income Tax + State Taxes ) / Salary, where Salary is the absolute total amount earned (and not Adjusted Gross Income, which is what the tax calcs use - AGI has already had 401k, etc subtracted. The "Salaray" amount never shows up on any tax form, only on your W2).

Adding in voluntary retirement is a valid idea but very complex. I choose to pay the absolute maximum into my 401k (15k/year) but that's a choice. Then what about employer match to 401k - that would have to be income I guess, to be fair to the calculation. I'm assuming (though could be wrong) that UK 'National Insurance' is a pretty basic offering; perhaps along the lines of US Social Security - not something you'd want to have to survive on? What ARE you supposed to do in the UK for retirement? Maybe N.I. is a comfortable package and you don't have to worry about anything more?

Considering medical is also a valid idea, but again very complex. My company subsidize my medical almost 100%; I checked my last paystub and I only had to contribute $20 or so. But yes, throwing any premiums you have to pay into the calc is valid I think.

I think that's it for the 'income tax' side of things.

For other taxes, there is property tax here (homeowners only); is the 'poll tax' still alive there? Sales tax here, VAT there.

Then there's hidden taxes - stuff that costs more due to government policies, etc. Cars and gasoline come to mind as the most obvious.

But perhaps the biggest factor of all that makes the 'tax' issue secondary is "how much you can make" in the two places. It's easy to get hung up on having to pay 'x' more here / there for this or that, but those things may or may not be offset by the total income you make.

I came here because as a programmer in the UK, the pay was pitiful back in the 80s, and it was hard to find a satisfying job in a good environment. I went from 9,000 pounds UK to 30,000 dollars in the US back in 83; for me there was no comparison. Even after factoring in medical, state tax, property tax, etc, I still came out way ahead so nothing to complain about.

The situation could be very different for teachers, nurses, etc - jobs that are possibly not well paid here (which is a crime, but that's another story).
Dunno - my friend who is a nurse is VERY well paid. Makes well more than most programmers I'd think.
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Old Dec 12th 2007, 5:33 pm
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Default Re: UK Tax compared to US Tax

Originally Posted by Elvira View Post
Yeah, and the Medicare deduction... 12.3 % in my case... (and I'm never going to collect on it...)
How do you get 12.3%? FICA is made up of two components - Social Security Tax and Medicare Tax, and cannot exceed 7.65%. From this page: http://blog.accountingcoach.com/soci...-medicare-tax/

=================
The Social Security tax rate for the year 2007 is 6.2% on the first $97,500 of an individual’s 2007 salaries and wages. (In 2006, the Social Security tax was 6.2% on the first $94,200 of salaries and wages.) Social Security tax is the largest portion of the tax referred to as FICA.

The other part of FICA is the Medicare tax which is 1.45% of the entire amount of an individual’s salaries and wages. In other words, the FICA tax is 7.65% of the first $97,500 of an individual’s 2007 salaries and wages and then 1.45% on the 2007 salaries and wages in excess of $97,500.
================
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Old Dec 12th 2007, 5:36 pm
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Default Re: UK Tax compared to US Tax

Originally Posted by Steerpike View Post
How do you get 12.3%? FICA is made up of two components - Social Security Tax and Medicare Tax, and cannot exceed 7.65%. ================
I am self-employed. You really get shafted here if you run your own business - unless it's big business.
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Old Dec 12th 2007, 5:38 pm
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Default Re: UK Tax compared to US Tax

Originally Posted by Steerpike View Post
How do you get 12.3%? FICA is made up of two components - Social Security Tax and Medicare Tax, and cannot exceed 7.65%. From this page: http://blog.accountingcoach.com/soci...-medicare-tax/

=================
The Social Security tax rate for the year 2007 is 6.2% on the first $97,500 of an individual’s 2007 salaries and wages. (In 2006, the Social Security tax was 6.2% on the first $94,200 of salaries and wages.) Social Security tax is the largest portion of the tax referred to as FICA.

The other part of FICA is the Medicare tax which is 1.45% of the entire amount of an individual’s salaries and wages. In other words, the FICA tax is 7.65% of the first $97,500 of an individual’s 2007 salaries and wages and then 1.45% on the 2007 salaries and wages in excess of $97,500.
================
If you're working for an employer - you pay part, and they pay part.

If you're self-employed - you pay all of it.
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Old Dec 12th 2007, 5:42 pm
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Default Re: UK Tax compared to US Tax

Originally Posted by Steerpike View Post
I'm assuming (though could be wrong) that UK 'National Insurance' is a pretty basic offering; perhaps along the lines of US Social Security - not something you'd want to have to survive on? What ARE you supposed to do in the UK for retirement? Maybe N.I. is a comfortable package and you don't have to worry about anything more?
NIC also includes the NHS though as well as other benefits
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