Scottish Budget: Warning some could take home just 30p in the pound

Economists have said some higher rate taxpayers in Scotland could take home as little as 30p in the pound following decisions in the Scottish Government draft budget.

Finance Secretary Derek Mackay delivered his draft budget yesterday. Picture: PA Wire
Finance Secretary Derek Mackay delivered his draft budget yesterday. Picture: PA Wire

Finance Secretary Derek Mackay outlined the Scottish Government’s draft tax and spending plans for 2019-20 on Wednesday.

These included freezing the threshold for the higher rate of income tax at £43,430, at odds with the rest of the UK, where it will increase to £50,000 from April.

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This widens the tax gap for higher rate taxpayers from the existing difference in rates of 41p in Scotland compared to 40p elsewhere in the UK, introduced in last year’s Scottish Government shake-up of income tax rates and bands.

Members of the Scottish Fiscal Commission predict the changes will lead to some higher rate taxpayers leaving Scotland or deter others from moving in, with the total behavioural changes expected to cost £6 million next year.

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They pointed out the forecast reduction would involve small hundreds of taxpayers and freezing the threshold is expected to boost tax take by £68 million.

The commission’s head of economy, income tax and VAT, David Stone, said: “We try to think about how it will affect behaviour.

“If you are currently sat at £45,000 and facing a 53% marginal tax rate, you put student loan repayments and pension contributions on that as well, you could be taking home as little as 30p in the pound.

“So the incentive to go for a promotion, work more hours it is going to have an effect in the income range and we’ve tried to capture that in our behavioural costing.”

Commission chief executive John Ireland said: “We think that bigger gap will affect where people chose to locate over time, both people thinking of coming to Scotland and people living in Scotland who can either leave Scotland or change their residency.

“We think it will knock off about £6 million from income tax revenues.”

Commission chairwoman Dame Susan Rice warned of the tight labour market in Scotland and said people might “think twice about coming to Scotland for a job”.

The commission also forecasts the Scottish Government could have to pay back £472 million to the UK Government due to differences in the forecast between the block grant and devolved tax take.

It was stressed the number is volatile and could become positive in future years, leading to the UK Government having to pay more to Scotland to reconcile the difference.

Overall, the commission has improved its economic growth forecast for 2018 to a 1.4% rise in GDP from its 0.7% prediction in May.

Recent strong economic performance is credited for the increase, which in 2019 is predicted to be 1.2% rather than the May forecast of 0.8%.

Post-2020 this becomes more subdued, said to reflect forecast low productivity growth.

Scottish Conservative finance spokesman Murdo Fraser said Nicola Sturgeon is imposing a “tax on aspiration in Scotland”.

“As the impartial Commission says, people who might be thinking of putting in more time, or working to get a bonus may well conclude there is little point, given the extra tax they will have to pay,” he said.

“If the tax gap means that higher rate taxpayers could lose as much as 70p of every £1, is it any wonder it changes the way people behave?”

A Scottish Government spokesman said: “Most taxpayers will pay less income tax next year than if they lived elsewhere in the UK, while 99% will pay less than they do in the current financial year, assuming the same income.

“Anyone moving to a higher salary will still earn more in take-home pay than they would without any promotion.”

Minister for Public Finance Kate Forbes said: “It is absurd to suggest that anyone will be paying tax at a rate of 70% in Scotland - and any analysis of the actual figures proves this.

“It also is totally incorrect to say that pension contributions or student loan payments are a form of tax, or to suggest that they don’t exist in the rest of the UK.

“Those who do pay more tax than in the rest of the UK also gain the benefit of substantial social entitlements that are not available in the rest of the UK.”