Average tax and social security deductions amount to 30% of the average employee’s earnings across the EU but there continue to be wide discrepancies. The range is between 18% and just under 42%.
At one end of the scale, for every e100 earned by an Irish employee on average pay the state takes e18. At the other end of the scale almost e42 are deducted from every e100 earned by an employee in Belgium. The UK’s level is a modest e25 - the fourth lowest of all EU member states (see Table 1).
It is no wonder that tax harmonisation, widely talked about as an ideal in the EU, is such a hard nut to crack.
How do pension costs impact on this comparison? Leading the stakes of the countries in terms of mandatory deductions from pay are countries that have traditionally provided generous and comprehensive social security systems for their citizens. Generally, a more modest state benefits system allows employees to enjoy lower levels of tax and social security contributions. The two do not always go together. Employees in Portugal, Spain and Greece appear in the lower half of the Table, but in their case the reason is not low levels of state benefits but an explicit bias in the structure of the social security contributions scale in favour of employees.
Of course, in countries where the social security system does not provide generous benefits, employees need to make, together with their employers, separate contributions to occupational pension plans. This is very much the case for employees in the UK and Ireland where the overall level of withholding can increase by between 3% to 4%. This is just the minimum level of contribution necessary for those employees whose employer provides a reasonable occupational retirement plan. In fact, frequently employees pay additonal voluntary contributions in order to achieve a reasonably adequate level of retirement income or indeed healthcare.
Column2 of Table1 below shows the adjusted level of deductions if the typical employees’ contribution to occupational benefit plans is added on.
As can be seen even after this adjustment, the placing in the league table remains virtually the same.
Do lower deductions make for a better standard of living? As Tables 2 - 4 show for gross and net pay for the average employee, this is not necessarily the case.
Allowing for tax and social security contributions, the average take-home pay in the EU is e24,063. This rises to e56,615 at comparable executive level (full details not shown in the table).
Luxembourg and Germany award the highest take-home pay to employees at both senior and more junior levels. For executives, those countries with the lowest take-home pay are Finland and Sweden, while average earners are worst off in Greece and Portugal.
UK workers on average earnings are eighth in the EU league table of take-home pay, earning e25,295. Executives do somewhat better, rising to position four in the table and earning e66, 377.
Average earners’ take-home pay in the UK e25,295 compares with e27,021 in France and e29,662 in Germany. Net pay for UK executives e66,377 compares with e65,771 in France and e73,572 in Germany.
Where, as in the case of Germany for example, high deductions are matched by high pay, there is hardly any change in the competitive placing. In other countries, for example Italy, Denmark, Sweden and Belgium there is a perceptible effect of the high deductions on the pay league table.
Ultimately, the level of deductions is not the all - deciding factor in the stakes of standard of living. Levels of pay are much more important. Table 4 shows the comparison of net pay after adjustment for differences in costs of living between capital cities. And high levels of pay have much more to do with the economic success of a country. In all the cases Luxembourg (and similar countries such as Switzerland if it had been included in the tables), with a tradition for a high success at generating wealth, figure very high in the tables. The level of deductions can however make a certain difference. The position of UK employees, for example, appears to improve once deductions are taken into account.
What the tables of pay show is that there are still some significant differences in pay (whether before or after deductions, whether with or without adjustment for cost of living) in countries that currently constitute Euroland. When the Euro was being launched there were concerns that once levels of pay could be more easily compared, there would be pressures from low pay countries to catch up with the better off.
There is no evidence of this as yet. But it has not escaped the attention of the decision-makers in the EU. The pressure is on for more harmonisation in the level of taxes across the member states. It is still too early to say how fast the pay gap will close or if indeed it will. What is certain is that those countries with high levels of deductions are unlikely to make any significant reductions in the near future.
Generous social security systems are particularly hard to cut back. Even a return to a livelier rate of economic growth will not be enough to restore the financial health of state systems while reducing contributions. The difficult demographic scenario means that at best what most governments in Europe hope for is to keep levels of deductions at current levels.
In the midst of a fast moving global economy, comparison across borders will become more commonplace. While a totally harmonised level of pay, taxes and contributions is not even on the horizon and it would be unrealistic to imagine otherwise, a narrowing in the gap is to be expected. The challenge to employers is that this does not consist solely of all countries equalising up to the most expensive.
In the research on which this article is based, average earners will typically hold the position of a team or section supervisor. Specific positions include a foreman or information/marketing officer in a medium-sized manufacturing or service company with e50 -100m turnover.
Executives represent operational directors reporting directly to the MD/chief executive. Typical posts are head of finance, HR director or technical director for a medium-sized company with a turnover of e50 -100m.
Brian Waite is an international consultant with William M Mercer in London

Topics