Fascinating Facts #1: Income tax and NICS

HMRC have published interesting new information about some of the taxes paid and benefits claimed by people from the EU and EEA/EFTA countries in the UK (HMRC use the term EEA nationals but that’s not strictly correct as their tables include Switzerland which is not in the EEA but in EFTA).

This responds to Freedom of Information Act requests by me and Jonathan Portes (and maybe others have been asking too) but answers more of my questions than his as Jonathan’s requests are usually much longer and more complicated than mine, befitting his status as a professional economist. I’ll tell the tangled tale of the tortuous journey to obtain the information at another time, and in this blog take a first look at the data on taxes paid.

Firstly, who’s in these figures? HMRC say that the data “relate to all individuals who have a live employment record in the PAYE system for the tax year [the year ending 5th April 2014] or have to submit a self-assessment return for the tax year.” The total is not the number of people from the EU who are living in the UK because on the one hand it doesn’t include people who weren’t working in the year but on the other hand it does include people who worked while only here for a short time as long as they were properly reported to HMRC by their employers.

From these records HMRC have estimated the number of taxpayers from each country and how much income tax they pay in total. Broadly, with a personal allowance of £9,440 in the year, people whose income was less than this will not be included in the number of taxpayers. They also estimated the number of people paying National Insurance (NICS) on the basis of those making Class 1 employee and Class 4 self-employed contributions. Broadly, with a Primary Threshold of £7,755, people whose income was less than this will not be included in the numbers paying National Insurance. On the other hand the amount of National Insurance paid includes the matching contributions made by employers. The individuals who do pay NICS I’ll call NICSpayers. As they correctly point out, people pay other taxes too, but income tax and NICS together are the vast majority of direct taxes paid by individuals.

They have also split out people whose ‘effective date of arrival’ in the UK was between 5 April 2010 and 6 April 2014 who they call recent arrivals. I’ll refer to those who arrived before then as earlier arrivals.

While the figures for taxpayers and NICSpayers are for the very first time broken down by country of nationality at time of allocation of National Insurance number — which broadly is a proxy for country of origin — they do not include totals for the UK-born for comparison.

So after all this preamble, how much income tax were taxpayers from the EU and Switzerland paying in 2013/14? Here’s the picture for total amount paid. The top 10 are all Western European with the exception of Poland. French people are the largest contributors by some margin. Looking at recent arrivals the French contribute even more, accounting for over 20% of income tax paid by recent arrivals.

The total amount paid is of course determined by the number of individuals as well as how much they earn. Looking at the average amount paid by each taxpayer the picture is unsurprisingly a bit different. While France is still out in the lead, Poland slumps from third to third last.

The average payment by people from every Western European country (except Portugal) is more than double the average payment by people from every Eastern European country (except Spain isn’t quite double Czech Republic). In fact the average Western European payment at £11,110 is nearly five times the average Eastern European payment of £2,172. The black line is the average income tax payment for all UK taxpayers from HMRC’s annual statistics. Average Western European payments are more than double that amount, average Eastern European payments are about half of it. Also notable is the extent to which recently arrived individuals pay much less than earlier arrivals. In particular, recent arrivals from Spain, Ireland, Italy and Greece pay very much less in percentage terms than earlier arrivals from these countries.

Turning to National Insurance contributions, these data are slightly harder to interpret as they include employer contributions as well as the amounts paid directly by individuals and although for income tax the more you earn the higher the rate you pay, it is the opposite for National Insurance as once you start paying higher rate income tax of 40% your NICS rate goes down from 12% to 2% if an employee, and 9% to 2% if self-employed. So lower earners pay proportionately more in National Insurance than high earners. The result when looking at the total amount paid is that Poland shoots to the top of the list and Lithuania and Romania enter the top 10, and Belgium, Denmark and Switzerland move down near the bottom.

However, when looking at the contributions paid per head, as with income tax the picture changes to shuffle the Eastern European countries down to the bottom again. But the absolute difference between highest and lowest contributors in less than for income tax because of the reduction in NICS rates for higher earners, and the average Western European payment is ‘only’ three times the average Eastern European payment rather than five times for income tax. HMRC don’t publish figures from which a whole-UK comparison can easily be made.

It’s also interesting to see how many people overall are on HMRC’s books as paying tax or National Insurance. The picture below shows the total from each country and as above, the numbers of taxpayers is essentially the number of people with income of more than £9,440 and the additional ‘NICS only’ are people earning between £7,755 and £9,440 as Class 1 and Class 4 National Insurance is not paid for people with income below the former amount. It might seem surprising that there are quite a few people from some countries earning these low ‘NICS only’ amounts in the year but this group will include for example permanent part-time workers who don’t work many hours a week, temporary workers who don’t work throughout the year (like seasonal agricultural workers and short-term residents doing bars or hotel work) and people arriving part-way through the year who will have received only a few months pay in the year.

There will of course be people working in the UK (primarily from the same groups) whose income is lower than even the NICS threshold who are not recorded as contributing at all. The HMRC statistics give the total number of people contributing as 1.95 million. This is the group in the picture above. But elsewhere in the statistical release they say that 2.54 million individuals “had a live employment sometime in the year ending 5th April 2014 or had been issued with a notice to file in Self Assessment”. The implication is that a further half million or so people from the EU did some work in the UK but didn’t earn enough to pay either income tax or National Insurance. For income tax, the figures HMRC do give show that nearly half (43.5%) of the total 2.54m individuals don’t pay any income tax. Unfortunately HMRC don’t break this down by country which might have been illuminating. Further, the number is considerably higher than ONS official statistics for the number of people from the EU working in the UK. But that’s an issue for another day!

Finally for this blog, HMRC give a figure from which the total income tax and NICS contributions made by the top 2% of recent arrivals can be inferred to have been not far short of half of all income tax and NICS paid by this group. This means that of the 755,000 recent arrivals who are paying something, about 15,000 are paying on average £90,000 each. Conversely, everyone else is paying on average less than £2,400. The implication of this is that the very much higher average payments by Western Europeans than Eastern Europeans in the charts above might be driven by a very small number of very high earners. However this is again rather tantalising as the relevant figure is not broken down by country.

So that’s a brief initial look at the data on income tax and NICS payments. Lots of interesting stuff, subject to cautionary notes and new questions begged! A similar look at the data on HMRC benefits will appear in due course….