Further tax divergence must come hand in hand with public reassurance - Sean Cockburn

Sean Cockburn, Director, Mazars

The SNP have had a difficult year – most recently following their heavy defeat to Labour in the Rutherglen and Hamilton West by-election – so it was no surprise that Humza Yousaf was keen to use the SNP party conference in Aberdeen as an opportunity to draw a line under the past and look forward to the future.

As expected, much of the focus was on independence and what might be inferred from the outcome of the next General Election. But there was no detail on how the Scottish Government would address the budgetary shortfall and no mention of tax beyond the headline grabbing freeze in Council Tax rates across Scotland next year.

For the time being, changes to the Scottish Government’s tax policy will be limited to the devolved tax powers – in particular the ability to control income tax. In that regard the clearest suggestion there could be changes was the when the First Minister hinted he was open to further increasing income tax rates in Scotland back in April. This was on the back of the Scottish Trades Union Congress’ (STUC) proposal of a 44 per cent tax rate on earnings between £75,000 and £125,140. Scottish taxpayers already pay more income tax than those in the rest of the UK and the public will want to understand the benefits they will see from increasing the divergence in tax rates.

The Scottish Government will argue that it has created a ‘f airer’ tax system and note that those on lower incomes actuall y pay less income tax in Scotland. However, the maximum benefit a Scottish taxpayer could see is just £21 per year and this reduces to nil as an individual’s income approaches around £28,000, after which Scottish taxpayers pay increasingly more than the rest of the UK – with some particularly high effective rates of tax for incomes between £43,663 and £50,270 and over £100,000.

First Minister Humza Yousaf addresses the SNP Conference in Aberdeen. (Picture: Peter Summers/Getty Images)

There is currently little evidence to suggest that the additional tax burden has led to widespread behavioural change. However, our latest research showed that two in five (43 per cent) of high net worth individuals living in Scotland see the tax regime as a significant driver of where to base themselves and their families so taxpayer behaviour must be considered in tandem with any future change in rates as there are options for those who wish to legitimately reduce their tax burden.

These might include incorporating a self-employment so that profits are subject to the lower rates of Corporation Tax that apply throughout the UK, increasing pension contributions, working less or even leaving Scotland altogether. Further increasing the income tax divergence between Scotland and the rest of the UK can only amplify the tax avoidance motive, especially if the UK Government chose to introduce UK tax cuts ahead of the next General Election.

From a practical perspective, Scottish taxpayers already have five income tax bands in relation to their earned income, in addition to the UK rates that apply to any dividends, interest or capital gains. The introduction of another tax band will further complicate the already complex tax system and will likely present challenges to taxpayers, advisers and HMRC who will have to implement and apply any changes.

With the Autumn Statement now scheduled for 22 November it will be well into December before we have the Scottish Budget and learn of changes for the coming year. If the SNP does plan a further increase on income tax rates for Scottish taxpayers, it will need to be accountable on how it intends to use the additional funds.

Sean Cockburn, Director, Mazars