Scottish Budget: Warning top earners could leave country as MSPs back tax hike

Top earning Scots may leave the country to avoid higher income tax rates after MSPs tonight backed plans to widen the gap to the rest of the UK, tax experts have warned.

The income tax changes for 2019/20 were passed by 61 votes to 52 at Holyrood with the Greens abstaining.

The tax measures being passed now means that the full budget can be passed on Thursday.

The Chartered Institute of Taxation says many higher earners could also legally alter their tax affairs to minimise the tax they pay, along with the danger that many could leave the country altogether.

Derek Mackay has defended his Budget deal. Picture: Jane Barlow/PA Wire

High and middle earners will pay hundreds of pounds more in tax than those south of the border. However, a majority of Scots workers (55%) will pay marginally less.

Alexander Garden, chair of Chartered Institute of Taxation’s Scottish Technical Committee said workers on the Higher and top rates of tax represent less than 15 per cent of all Scottish taxpayers - but contribute almost 60 percent of revenues.

This group may now move to take steps to “legitimately limit” their tax liabilities.

“These taxpayers may choose to limit the number of hours that they work to avoid being pushed into higher rates of tax,” he said.

“They may also choose to increase the amount of pension contributions that they make, effectively increasing the thresholds above which they pay higher rates of tax.

“For the self-employed, the opportunity to pay lower rates of corporation tax by incorporating their businesses, as opposed to paying income tax, may also become a more attractive option. Higher earners, or those with greater mobility, may even choose to relocate away from Scotland.”

The Higher rate threshold of 41 pence in Scotland will be frozen at £43,430 in Scotland, affecting about 367,000 workers next year. This freeze will raise an extra £68 million, compared wtih an inflationary increase, in revenues for public services. Workers south of the border won’t start paying the Higher rate (40 pence elsewhere in the UK), until they make £50,000 after changes set out by Chancellor Philip Hammond.

Finance minister Kate Forbes told MSP at Holyrood earlier: “Now is not the time to pass on the UK Government’s tax cuts for the highest earners.”

She added: “The decision on tax that we have taken have enabled us to mitigate the decade long bite of austerity that’s been inflicted by the UK Government on our resource budget and to continue to invest in our pubic services in our people and in out businesses.

“Since the Scottish Parliament acquired powers over income tax, this Government has been clear that income tax should support the delivery of vital public services and enable investment in the economy.”