Scottish budget blog image useOnly 5 weeks ago, the UK Chancellor Philip Hammond gave his Budget speech announcing that “the era of austerity (is) finally coming to an end”.  On 12 December the Scottish Finance and Economy Secretary, Derek Mackay, will deliver his Scottish Budget detailing the Government’s spending and tax plans for the coming year.  The question on many Scottish taxpayers’ minds is whether their finances will enjoy a post austerity boost.

Last year was an important year for Scottish taxation.  It was the first year the Scottish Parliament was able to set the income tax rates and bands that apply to Scottish taxpayers.  The Scottish Government took the decision to replace the three UK tax bands (20%, 40% and 45%) with five bands (19%, 20%, 21%, 41% and 46%).  These changes were intended to promote the Government’s four tax policy tests, namely to; maintain and promote public services, make the tax system more progressive, protect lower earners and support economic growth.

The effect of these changes was that Scottish taxpayers earning less than £26,000 (1.4 million tax payers) will pay slightly less income tax in 2018/19 than if they lived elsewhere in the UK. By extension, 1.1 million Scottish taxpayers will pay the same or more tax than their rest of UK counterparts.  Of these 1.1 million individuals, 294,000 people pay tax at the higher rate and 13,300 at the additional rate.  As a percentage of total taxpayers, Scotland has fewer higher and additional rate taxpayers than the rest of the UK as a whole.

The UK Chancellor has announced that he intends to raise the threshold where people start paying higher rate tax to £50,000 from April 2019.  Derek Mackay has indicated he will not match this. As a consequence the difference between Scotland and the rest of the UK will be more noticeable.  If the Scottish higher rate threshold increases by inflation then an individual earning £50,000 would pay some £1,350 more tax in Scotland than their neighbours in the rest of the UK (as compared to £824 in 2018/19).  

Of course, income tax is only one part of the equation.  People in Scotland pay no tuition fees, enjoy free personal care for the elderly and have no prescription charges.  This is part of the Scottish Government’s social contract which aims to deliver additional services in return for higher taxes.

However Derek Mackay chooses to balance the nation’s books he faces a challenge.  Raising tax rates for higher earners would yield very little. Research by the Fraser of Allander Institute estimates that an extra 1p on the higher rate of tax would raise an extra £64m whilst 1p on the additional rate yields £2m (after behavioural responses).  It is arguable whether an extra 1p would cause people to leave Scotland, but it is important that Scotland continues to be seen as an attractive place for people and businesses to move to.  We have an ageing population, a shrinking working age population and it is vital for our future that we do not deter people from choosing to come to Scotland.

John Macintosh blog

John Macintosh - Partner, Tax

John oversees Deloitte’s tax practice in Scotland and is also the senior partner for the Edinburgh office.  He is a corporate tax specialist and uses his substantial experience to advise a range of listed and privately owned companies on their most complex transactions.

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