Reading an article in the Press earlier this week I was once again reminded how readily people confuse two different areas of Government taxation. Whilst allowance has to be made for attention-grabbing headline writers, emotive phrases such as “tax evasion”, “tax avoidance” and “tax havens” being bandied about to then include Social Security/National Insurance in the same sentence is technically incorrect. It also needs to be kept in mind that tax avoidance is perfectly legal.
Income Tax is basically what it says, a tax on most forms of income including, amongst many other things, salary, share dividends, rental income, pensions, and other forms of income. Some income may not be taxed but generally, there is a tax liability on most forms of earnings.
Note the term liability, whilst there is a liability for an individual to pay tax it may be that because of various allowances and other rules the amount of tax actually payable can be reduced, sometimes to zero. For example, seafarers who spend more than a certain amount of time outside their country of residence may receive relief on the amount of tax that they pay on their income. Relief can be given for many reasons, too many to list here.
The eligibility to pay tax is generally related to the country of domicile or residence of the individual i.e. the country that you call home even if you live and work in two or more countries.
The revenue derived from income tax is generally used to pay for the services the government provides.
Social Security/National Insurance is a fixed amount that is deducted from your salary generally as a percentage of the total amount (less any lower or upper earnings limit that may apply before deduction).
Not only is the employee liable for social security but also the employer, again a percentage of the employee’s salary, whereas the employer is not liable to pay any income tax on the salary.
The opportunities to reduce the amount of Social Security payable are far fewer than those associated with income tax but because of social security agreements the contributions payable could well be due in a different country from that in which tax liabilities arise. It is common, particularly where seafarers are employed, for the employer’s share of the contribution not to be payable. This, however, has no adverse effect on employee social security benefit entitlements because such entitlements are based purely on the employee’s share of the contribution which generally remains payable.
Social Security/National Insurance is used by the Government to fund specific items such as healthcare, pensions and other social benefits. Therefore in summary, whilst a group of ten people working for a company, earning a similar amount may all pay different amounts of tax because of their personal situations, the social security amount that they pay will probably be the same.