// you’re reading...


compare and contrast: UK and US tax burdens

WSA adsense code -->

Ok, this probably falls under things that I think are interesting, but am not sure if anyone else does.

Over here at least the United States is considered to have the following features compared to the UK:

  • lower taxes
  • reduced public services
  • higher salaries
  • lower cost of living

Now, I suspect that some of this is quite variable, in particular some things will be dependent on the exchange rate and others on location, and personal income. But, I thought I’d investigate the extent to which the first would be true for me if instead of living in Blighty, I lived in America.

I’m assuming that the exchange rate is £1 = $2, and that I would have had exactly the same income in the US as I enjoyed in the UK last year. Since Americans have state taxes as well as federal taxes, I needed to pick a state.

I live in a not very fashionable or exciting city somewhere vaguely near in the middle of the country. So, I reckon a comparable place would be a fly-over state, and since my alter ego in the US is rocketc who last year lived in Wisconsin (he’s since moved to Colorado), I’ve decided to pick Wisconsin. I hear it has good beer, so that’s a bonus.

I used the 1040 to estimate the federal income tax. I stuck just to my salaried income, and assumed that I would have made the same level of contributions to a 401(k) as I actually made to my work pension. This gave me a federal income tax of approximately $7,500 (so about £3,750). The FICA (like NI) contribution was calculated as about $2,250 (£1,125), and the Wisconsin state income tax as $2,800 (£1,400).

My actual UK income tax last year was around £4,500 ($9,000) and my NI (like FICA) contributions were around £2,400 ($4,800).

People quick at arithmetic will note that my tax burden would indeed be lower in the US (as represented by Wisconsin) than the UK. It turns out to be approximately £50, or $100, lower.

Now my big caveat is that my UK taxes include access to very comprehensive health care provided by the NHS and I’m not sure what a typical health insurance premium would be. If anyone could give me a vague figure for an HMO plan in WI I think that would make a reasonable comparison.

I have to be completely honest and say that if I was offered an extra £50 a month to live in Wisconsin, I’m pretty sure I would turn it down. America, nice country, but I prefer to live on the right (hand) side of the Atlantic. But still, I thought it was interesting.

Similar Posts:

If you like what you're reading, why not leave a comment below, subscribe to my feed, or check out some of my best posts.


22 comments for “compare and contrast: UK and US tax burdens”

  1. Plus you’d freeze in WI. Moving you fictionally to Milwaukee, WI and pretending you were a government non-postal worker (because I’m bored at work and it’s what I have access to) you would pay the following monthly premiums with the listed plans:
    United Healthcare insurance Company (HMO)– $89.55/mo., $2000 in-network yearly deductible.
    Blue Cross/Blue Shield, standard (PPO/FFS)– $134.66/mo., $300 yearly deductible.
    Aetna Healthfund (HDHP)– $67, $1500 in-network yearly deductible.

    Just in case someone doesn’t know, a yearly deductible is “The amount you must pay for health care, before your health plan begins to pay. There is a deductible for each benefit period - usually a year. There may be separate deductibles for different types of services. Deductibles can change every year.” Some expenses count towards the deductible, some don’t. It’s different for every plan.

    Posted by Becca | August 1, 2008, 6:45 pm
  2. Some places have city taxes too. NYC and Yonkers being two that I’m pretty familiar with.

    Are there “typical” health insurance premiums in the states any more? I know ours varied every bloody year, and that was with the same employer.

    Posted by guinness416 | August 1, 2008, 7:07 pm
  3. I love this kind of thing! I did a Canada-UK comparison to see if I was coming out ahead here.
    There are so many things to take into account though- my medicare and prescription costs here are more than balanced out by lower rents and electricity costs. (still miss the nhs though!).

    Posted by Looby | August 1, 2008, 8:00 pm
  4. All I know is I hate implementing taxes for the States in the system.

    Bloody convoluted crazy effed up system. District, State, County, Area, Country taxes… the combinations are nasty when you have to code ‘em all in.

    Posted by Fabulously Broke | August 2, 2008, 12:43 am
  5. Outside of government employers, I don’t know if there is a typical insurance premium.

    Some employers subsidize your entire premium. Others pick up the tab for considerably less. I’ve seen plans where it’s relatively cheap to insure spouses and expensive to cover kids, and vice versa. Although I guess if neither of those apply there is less variation.

    Posted by Sean | August 2, 2008, 1:00 am
  6. @Looby:
    I’m pretty sure that the cost of living would be lower in the US than it is in the UK - every time I go anywhere outside Europe (and sometimes inside) I notice that food is much cheaper, especially eating out. I use the Big Mac Index, and it’s putting costs in the UK at 28% more than those in the US (I checked and the salary for my job in $ would be about twice what it is in £). So I’d be financially better off if I lived in the States, as I probably would be in Canada but slightly less so.

    Posted by plonkee | August 2, 2008, 7:50 am
  7. Wisconsin has large real estate taxes too, so you might want to factor that in. And what about sales taxes? I think in England VAT taxes are higher than sales tax in Wisconsin. VAT taxes are part of the reason things cost more in Europe probably a bigger part lately is the strength of the Euro and Pound.

    Posted by Curious Cat Economics Blog | August 2, 2008, 1:55 pm
  8. You forget VAT. That’s a huge hit to the wallet, and there isn’t any in the US.

    Posted by happyturtle | August 3, 2008, 1:56 pm
  9. VAT is a stealth tax in the UK - it’s not marked on the prices of things that you buy in shops so you don’t notice it. From the point of view of the consumer, it’s similar to sales tax though, which many US states have.

    Posted by plonkee | August 3, 2008, 5:55 pm
  10. Whoa. Waitaminit.

    First, if you were a federal employee, you wouldn’t be paying into the Social Security system. Federal employees have a different retirement system and are exempt from FICA taxes.

    As Becca points out, health insurance premiums, which can be absurdly high, are another kind of tax. Next year I will pay about $250 a month to insure ONE PERSON, myself. If I had a partner, spouse, or child, the amount would be almost $500 a month. While this is counted as a tax deduction, it still is ripped out of your take-home pay: it’s $250 or $500 you can’t use to buy food or pay the utilities.

    The tax system in this country is staggeringly complex, because special interests and their lobbyists have bought off legislators and regulators to produce a labyrinth of exceptions. It is so involved that even tax lawyers have a hard time keeping up with it.

    For example, the money I’m using to pay the mortgage on the Investment House is coming out of a large IRA. I’m using pre-tax money to help my son buy a house. In theory, I should pay taxes on it at my present tax rate, about 28%. But because it’s run through my books as investment money moved to another investment and because investments & investment income have their own complex set of deductions, the tax is a wash. When we sell the house and recover the cash we’ve invested in it, I presumably will pay capital gains tax, about half my regular tax rate.

    Meanwhile, because my son is living in the house, he is deducting his part of the mortgage payment.

    Each state, county, and municipality has its own taxes. In my city, we now pay 8.3% on all purchases except for food. The state is about to jack up its tax substantially, so that in a few months our sales tax will be around 9%. Some states charge residents an income tax; some do not. Some cities charge income taxes to anyone who is employed within the city limits, whether they live there or not. Some have no income taxes. Some have no sales taxes; some have no gas taxes.

    When I lived in England, the VAT seemed to be very high–something I guessed because prices for all goods were significantly higher than the same kinds of things (often products of higher quality) sold in the US. At that time, Harrod’s-quality clothing and furniture were available in the US at the same or lower prices than Walmart-quality goods cost in the UK. That is no longer true. So, if prices for comparable goods are higher in the UK than they are in the US, probably the VAT is higher than typical US sales taxes.

    Then we have the issue of what you get for your health-care premiums. Enrolling in an HMO is a risky proposition: it is not in the interest of an HMO to treat you for an expensive condition. Consequently, in some HMOs you will have a very difficult time obtaining adequate care for an ailment that might rack up some big bucks, and you are trapped. You can’t go outside the HMO to a doctor who might see you in a timely manner, diagnose your condition accurately, and provide you with the best available treatment. Those of us who have had alarming experiences with HMOs stay out of them, selecting PPOs or EPOs instead. These options are significantly more expensive, but since most doctors are now forced into a system dominated by increasingly stingy insurance corporations, the care is not a heck of a lot better than you will get in an HMO. Heaven help you if you have to go to an emergency room, where you will be confronted by conditions reminiscent of the Third World. You can arrange a shot at good care by subscribing to a boutique medical practice: the cost is about $1,500 a year, above and beyond your health insurance.

    These and other factors make a comparison pretty difficult. A short-cut might be to figure out how much net pay a typical Brit and a typical American bring home from their gross pay. I bring home approximately 50 cents of every dollar I earn from my employer, approximately 70 cents of every freelance or windfall dollar (because my health insurance is taken out of my day job’s earnings), and 85 cents of every dollar of capital gains except for profits on the sale of a house, on which (in my price range) I pay no tax.

    Posted by Funny about Money | August 3, 2008, 9:25 pm
  11. Plonkee,
    As you can imagine, I am quite interested in this type of calculation, as an American who lives in London. I think a lot about the cost of living in US vs UK and the taxes on both sides. I think the health care savings that I experience here for me add a lot of added bonus and outweigh the additional tax burden. Although dental costs much more in the UK than when I had dental insurance in the US, and I have a NHS dentist! Also to factor in is how much higher savings rates are and the use of ISAs. I think I may be singing another tune next year when I enter the upper tax bracket in the UK and then have to ALSO pay tax in the US (we have a worldwide tax obligation!). I enjoyed your post, though!

    Posted by Savings Not Shoes | August 3, 2008, 10:36 pm
  12. Yipe! Thought the comment I entered above crashed when my system went down. Hope it’s not full of typos….

    BTW, I put a link to this in today’s round-up post at FaM. :-)

    Posted by Funny about Money | August 4, 2008, 12:44 am
  13. You forgot the car payment. You can’t live in Wisconsin without a car.

    I’m curious, though, about a “real-life” comparison. Perhaps you and rocket (or someone else) can do an actual comparison of expenditures…

    Posted by deepali | August 4, 2008, 3:43 pm
  14. Ugh. A car. It think that’s the real reason that most of America doesn’t appeal to me as an actual place to live (nice to visit though). I love not needing a car.

    Posted by plonkee | August 4, 2008, 7:30 pm
  15. it’s a reason most of america doesn’t appeal to me either! i don’t miss my car one bit.

    Posted by deepali | August 4, 2008, 7:36 pm
  16. First of all: congrats on being able to figure out the U.S. tax system. I have been living in California for 10 years and I’ll be damned if I understand the first thing about it.

    Second, mind the exchange rate issue when trying to decide whether another country is cheaper or more expensive - the answer changes as exchange rates fluctuate.

    The whole health insurance thing is, again, very convoluted. What you pay is completely dependent on the type of coverage your employer chooses to provide. For example, my employer covers me for free, but charges me $400 a month covering my wife and kids. My wife’s employer charges her about $50 per month to cover herself, but only about $100 per month to add the kids. Many employers don’t offer health benefits at all and if you are going to have to buy your own insurance… good luck (and bring plenty of cash).

    Posted by shadox | August 5, 2008, 7:18 am
  17. If you’d like some more details on Wisconsin, feel free to email me. I live there. :)

    Sales tax = 5.6%
    After all my benefits and taxes I take home about two thirds of my gross pay. From the tax numbers given, plonkee likely has a similar income, so that should be roughly accurate. Another point is that Wisconsin is one of the higher taxed states. Savings could be greater in some other states.
    Also, I would agree that you’d almost certainly want a car in Wisconsin even if you lived in Madison or Milwaukee. Gas is currently just under $4 in my area.

    Regular PPO health insurance costs about $36 biweekly for just me. I have a high deductible plan with a health savings account (HSA) for $3 biweekly. When I was in school I payed about $60 a month for independent insurance. It mostly just covered emergencies and serious health problems.

    Posted by Slinky | August 12, 2008, 10:42 pm
  18. such are the people we get in this world. we should ignore them and the more we ignore the less attention they get and hopefully they will fizzle out. but the media is to blame - writing n supporting them.

    Posted by Beaches Resorts | July 12, 2010, 10:13 am
  19. @funnyaboutmoney

    Though I don’t disagree with you about most of your post- I have to refute your claim that federal employees are exempt from FICA taxes. We do have a different retirement system (it’s called the TSP), but it’s not unlike any private pension or 401k provided by the private sector. I most certainly do pay my share of Soc. Security, just as I pay for Medicare and Medicaid.

    Just wanted to clear that up- before anybody else jumps on the federal hate train.

    Posted by Paul | November 24, 2010, 5:51 pm

Post a comment

Proud member of the