Jeff Salway: ‘Devo max’ heralds major moves

Global markets heaved a sigh of relief at the news of the No vote. Picture: AP

New tax powers for Holyrood are in the pipeline and further divergence from the rest of the UK is likely over the coming years, under promises set out last week by the Better Together campaign.

In a move aimed at arresting a slide in the opinion polls, it put forward an enhanced programme of devolution that will include increased tax raising powers. Changes made under that legislation will also affect investors and savers in Scotland, experts say, with benefits for retirees but additional costs for workplace pensions.

But it’s the extra income tax flexibility that may prove the most significant financial outcome of the referendum.

Craig Hendry, managing director at Johnston Carmichael Wealth, said: “The decision to stay in the UK may give some investors more confidence to proceed with decisions they had been putting off, but there are still many unknowns to be considered. There are future implications with the Devo Max proposals – will a different income tax level in Scotland alter pensions tax relief, for example?”

Under the present arrangement, the Scottish Parliament can alter income tax by up to 3p in the pound, although it hasn’t yet taken advantage of this. However, the Scotland Act (2012), which will take effect from April 2016, will allow Scotland to raise or lower income tax by up to 10 per cent in relation to the UK thresholds.

Those powers are now likely to be extended further, as part of the Devo Max negotiations that will soon begin under the stewardship of Lord Smith of Kelvin. The resulting draft legislation is timetabled for January, with a view to becoming law following next May’s general election.

It may also give the Scottish Parliament control of inheritance tax and capital gains tax, under Lib Dem plans.

Ronnie Ludwig, Edinburgh-based partner at accountants Saffery Champness, said: “Things will certainly be simpler than if it had been Yes, but given the devolution process in motion we are set for a great deal of change in the Scottish tax system.”

The changes already lined up for April 2016 have their own far-reaching implications, Ludwig added.

“We are going to have to define who is a Scottish taxpayer and who is not. So many of the people that I deal with have lives and businesses which span Hadrian’s Wall, and this will certainly not be straightforward,” he said.

“If Scotland’s income tax rate ends  up differing considerably from the  rest of the UK, we may see people  moving or rearranging their business affairs.

“We may also see deliberate tax competition with the rest of the UK.”

The potential difficulties created by increased tax powers will be compounded by the impact of income tax on the perks such as pensions relief and gift aid, Ludwig added.

Some changes could affect the value of workplace pensions by adding to the burden on employers, according to Mike Kennedy, partner at Barnett Waddingham.

“If differences arise in legislation and taxation between Scotland and the rest of the UK, this will lead to complications for administering schemes with members in both regions, and therefore increased costs,” he said.