Hazel Gough: Scotland facing taxing times

The Autumn Statement later this month will mark the first opportunity for Chancellor Philip Hammond to set out how he intends to manage the potential economic implications of Brexit.

Hazel Gough says the Scottish Government's tax plans could harm the economy. Picture: Steven Scott Taylor
Hazel Gough says the Scottish Government's tax plans could harm the economy. Picture: Steven Scott Taylor

What will follow, when the Scottish Government makes its next budget statement, could be equally important for Scotland’s economic future.

We are likely to feel the first impact of the Scottish rate of income tax (SRIT) following the forthcoming Holyrood budget. SRIT came into effect in April as part of the extra powers devolved to Scotland, and is payable on earned income, pension income and rental income by taxpayers deemed to be resident here.

Because SRIT had to apply equally across the existing 20, 40 and 45 per cent rates, any imposed tax rise in Scotland would fall hardest on the lowest paid – a one-point rise on a 20 per cent band would amount to a 5 per cent increase, but would be just over a 2 per cent rise for the highest rate taxpayers.

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That will change from next April, and therefore the Scottish Government intends to use its new powers by shifting the thresholds. George Osborne had pledged to increase the basic rate band to £45,000, but the SNP administration has announced that it intends to cap it at £43,387, in line with the consumer prices index.

Assuming that Hammond will proceed with Osborne’s pledge to raise this threshold, the Scottish Government plans would mean that higher rate taxpayers here would be worse off by more than £300 next year compared with counterparts in the rest of the UK, rising to more than £800 by 2021.

Divergence in tax rates and thresholds between Scotland and the rest of the UK also have other consequences. National insurance contributions (NICs), for example, are aligned to the UK basic rate with higher rate taxpayers paying a combined 42 per cent of their income in tax and NICs. For some Scottish taxpayers, this combined rate could amount to as much as 52 per cent.

While higher earners paying more tax can create better public services and enhance distribution of wealth, the concern within Scotland’s business community is that the Scottish Government’s SRIT proposals could harm the economy. Higher earners tend to be the most mobile of the working population and a number could relocate elsewhere to avoid a bigger tax burden.

While SRIT is a key aspect of the further powers recently devolved to Scotland, these measures could also have a significant impact on pay and pensions if not exercised with great care.

Creating a divergent tax regime puts Scotland into a competition with the rest of the UK, and could drive away some of the nation’s high earners and affect future investment decisions, all of which would ultimately put Scottish tax revenues at risk.

• Hazel Gough is director of personal and business tax services at Chiene + Tait