Growth Plan mini-budget: Nicola Sturgeon under pressure to address widening income tax gap

Nicola Sturgeon is under intense pressure to address a widening income tax gap that will see almost all Scots pay more than they would elsewhere in the UK.

It came as the First Minister said the super-wealthy would be “laughing all the way to the actual bank” after UK Chancellor Kwasi Kwarteng announced the biggest tax cuts in half a century.

Among a string of other measures, Mr Kwarteng scrapped the top rate of income tax and brought forward to next April a reduction of the basic rate to 19p in the pound.

Picture: Jeff J Mitchell/PA Wire

The changes do not apply in Scotland, where the Scottish Government controls income tax rates and bands. It is expected to publish an emergency budget review within a fortnight.

However, the Chartered Institute of Taxation (CIOT) highlighted the scale of the divergence between the Scottish and UK tax regimes if Ms Sturgeon does not make changes.

Sean Cockburn, chair of its Scottish technical committee, said: “We won’t know how the Scottish Government intends to respond until later this year so, absent this detail, it raises the prospect that all Scottish taxpayers earning more than £14,732 will now pay more income tax compared to taxpayers in the rest of the UK.

“As an illustration, someone in Scotland earning £27,850 would have paid the same amount of tax as someone living in the rest of the UK this year. The changes announced by the Chancellor mean that from next year, they would pay £152.80 more.

“The abolition of the additional rate tax raises the prospect of significant income tax divergence for taxpayers with income above £150,000.

“In Scotland, the ‘top’ rate of tax – as it’s called – is charged at 46p. Someone earning £200,000 next year would pay £6,045.80 more in income tax compared with someone in the rest of the UK.”

The CIOT said someone in Scotland earning £30,000 would pay £195.80 more than they would elsewhere in the UK. This rises to £1,863.40 for someone on £50,000 and £2,020.10 for someone on £60,000.

Ms Sturgeon suggested she would not replicate the income tax cut for the highest earners, tweeting: “A UK Gov ‘budget’ that benefits wealthiest over poor/middle income earners, tanks the £, pushes up the cost of (v substantial) borrowing, and is castigated as reckless. And yet Tories (& right wing commentators) will demand that the Scottish Government blindly follows suit. Mmm.”

The Fraser of Allander Institute, based at the University of Strathclyde, said mirroring the UK income tax changes would cost the Scottish Government around £400 million in foregone revenues.

It said Mr Kwarteng’s announcement of a cut to stamp duty in England would also pose “dilemmas” for the setting of land and buildings transaction tax, the equivalent in Scotland.

Liz Cameron, chief executive of the Scottish Chambers of Commerce, said businesses and households “now play the waiting game to see if the Scottish Government opts to take similar moves” to those announced by the Chancellor.

She said: “With control of powers such as income tax and land and buildings transaction tax devolved to Scotland, the expectation will be for the Scottish Government to deliver parity with the rest of the UK.

"Divergence between the nations risks dampening business and investor confidence.”

Scottish Conservative finance spokeswoman Liz Smith said: “If the SNP fails to pass on the UK Government’s cut in the basic tax rate, no one will be better off, but everyone earning more than £14,700 will be worse off.

"Someone on the average annual salary will be around £200 worse off than people on the same wage elsewhere in the UK. If the tax gap is allowed to widen, it can only damage Scotland’s economy, discourage investment and damage jobs.”

The Treasury said the Scottish Government would receive more than £600m of extra funding as a result of the income tax reduction and stamp duty cut in England. This will be delivered over the three-year period covered by the 2021 spending review.

It said more than 2.3 million workers in Scotland would also see a cut in their national insurance payments, worth an average of £285 a year, following the Chancellor’s statement.

Mr Kwarteng told the Commons tax cuts were “central to solving the riddle of growth” as he confirmed plans to axe the cap on bankers’ bonuses while adding restrictions to the welfare system.

But the pound dived to a fresh 37-year low amid fears the package had sent the UK markets into meltdown.

Mr Kwarteng said his economic vision would “turn the vicious cycle of stagnation into a virtuous cycle of growth”.

Shadow chancellor Rachel Reeves said it amounted to an “admission of 12 years of economic failure” under successive Conservative governments.

The Labour MP likened Mr Kwarteng and Prime Minister Liz Truss to “two desperate gamblers in a casino chasing a losing run”.

Treasury estimates priced the tax cuts, including the promised reversal of the national insurance rise and axing the hike to corporation tax, at nearly £45 billion a year by 2026. It said Government borrowing would increase by £72bn.

Mr Kwarteng said the two-year energy bills bailout will cost about £60bn over the first six months from October.

Elsewhere, he cancelled a planned alcohol duty hike on beer, cider, wine and spirits, in a move welcomed by the Scotch Whisky Association.

He also announced new low-tax “investment zones”, which will see planning rules relaxed and the reduction of business taxes to encourage investment.

The Treasury said these would be delivered “in partnership” with devolved administrations.

The package was announced a day after the Bank of England warned the UK may already be in a recession and lifted interest rates to 2.25 per cent.

Paul Johnson, the director of the Institute for Fiscal Studies economic think-tank, said Mr Kwarteng’s “big gamble” was the “biggest tax-cutting event since 1972”.

He said only those on more than £155,000 would pay less tax overall, adding: “The very rich will pay tens of thousands less.”

The Confederation of British Industry welcomed Mr Kwarteng’s announcement, with director-general Tony Danker saying “we have no choice but to go for growth to afford” support during the energy crisis.

Andrew McRae, Scotland policy chair for the Federation of Small Businesses, said it was “pleased to see a real recognition from the UK Government this week that tackling the cost-of-doing-business crisis is an essential step in addressing the cost-of-living crisis”.

But the Scottish Licensed Trade Association said it was “too little, too late”.

Ms Sturgeon was scathing, tweeting: “The super wealthy laughing all the way to the actual bank (tho I suspect many of them will also be appalled by the moral bankruptcy of the Tories) while increasing numbers of the rest relying on food banks – all thanks to the incompetence and recklessness of this failed UK Gov.”

Deputy First Minister John Swinney said the Chancellor’s statement would provide “cold comfort to the millions of people across Scotland who have been looking for the UK Government to use their reserved powers to provide support for those that need it most”.

He said spiralling inflation meant the Scottish Government’s budget is worth £1.7bn less than it was in December.

Unite general secretary Sharon Graham said the mini-budget was “unashamedly a budget for the rich, big business and the City”.