The Scottish Government would lose £20 million in planned revenue if “fewer than 20” of Scotland’s biggest earners move their main residence south of the Border to escape tax hikes.
The claim has been made in analysis by the highly respected Institute of Fiscal Studies (IFS), which examined the economic impact of Finance Secretary Derek Mackay’s decision to increase the Scottish rate of income tax.
This week marked the beginning of a new tax year that will see the introduction of Mr Mackay’s overhauled Scottish tax regime. Under his plans, everyone in Scotland earning more than £26,000 a year will pay more income tax than their counterparts in the rest of the UK.
According to the IFS, the tax changes are expected to raise £225m this financial year for the Scottish Government.
But business leaders have warned the new Scottish tax system will discourage investment as well as result in big earners, who pay the most tax, moving south of the Border to take advantage of the less punitive rates.
The IFS analysis, published yesterday, said that a risk of introducing the new Scottish system would be that individuals migrate south of the Border into England. Although moving is a costly business, the institute pointed out it would be relatively easy for Scottish-based individuals with another property in England to move their tax domicile south of the Border.
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The IFS said: “While genuine migration is costly, it may be easier for those with multiple properties to change their tax residence within the UK.
“The OBR (Office for Budget Responsibility) assumes no response in terms of genuine migration, but estimates that changes in reported tax residence as a result of this year’s changes will lead to revenue losses to the Scottish Government of around £20m – almost 10 per cent of the predicted yield. They note that an effect of this magnitude would require only a small number of additional rate taxpayers (fewer than 20) to switch their residence.
“This is because when a taxpayer relocates it is not just the additional tax revenue that the Scottish Government would lose, rather all of the income tax that they pay on their earnings would now go to the Westminster government rather than Holyrood.”
Mr Mackay’s system will see the additional rate of income tax for those earning more than £150,000 increase from 45 per cent to 46 per cent.
For an individual earning £150,000 that translates to a increasing income tax bill of almost £2,000 when compared to elsewhere in the UK. But should the most wealthy chose to change their tax residence it would only take a few for there to be a substantial overall impact.
Thomas Pope, of the IFS, said: “Basically, the Scottish Government is increasing the amount of tax these individuals have to pay by a relatively small amount. But if they chose to move, the Scottish Government doesn’t only lose the extra revenue they would have gained. They also lose all of the income tax they are currently paying and that would be paid to Westminster.
“If you have an individual who is earning say £2m a year, then their average tax rate is going to be close to 45 per cent because most of their income is in the additional rate band. That means they are paying nearly £900,000 in income tax. “If they move to England, then Scotland loses all of that income tax. That’s how a relatively small number of high earners can have quite a big effect. For these individuals it is plausible that they could have properties elsewhere in the UK.”
Last night the Scottish Conservative shadow finance secretary Murdo Fraser warned the new taxation system would drive away wealth and investment. Mr Mackay has argued his income tax changes will mean a majority of Scots will pay less this year than they did last year.
Last night he said: “The new income tax rates and bands will make the system more progressive and deliver additional revenues to invest in public services and the economy.”