New tax gap ‘will make the middle class spurn promotion’

Budget change could leave professionals taking home as little as 30p in the pound

MIDDLE class professionals risk being deterred from chasing promotions and pay rises as a result of a tax double whammy, according to the Scottish Government’s official forecaster.

The independent Scottish Fiscal Commission (SFC) said higher rate taxpayers could be left with as little as 30p in the pound once new Scottish Budget changes hit household finances.

The Scottish Tories accused Finance Secretary Derek Mackay of imposing “a tax on aspiration in Scotland” after he outlined his tax and spending plans on Wednesday.

It comes as independent Holyrood researchers warned councils face a real-terms cut of £318 million, sparking fears over the future of vital services.

Mr Mackay froze the higher rate of income tax at £43,430 for a second year while it rises to £50,000 south of the Border from April – opening up a widening tax gap north and south of the Border. This means someone earning £50,000 in Scotland next year will be £1,540 worse off than their equivalent in England or Wales.

Meanwhile, those earning between £43,430 and £50,000 will face a double tax hit due to national insurance contributions – leaving them with a combined 53 per cent tax rate, against 32% in the rest of the UK.

David Stone, the SFC’S head of economy, income tax and VAT, said the forecaster had examined how this would affect employees.

Asked if it could have an impact on pay deals, with fewer people moving into that income range, he said: “Precisely. We tried to think about how it will affect behaviour.

“If you are sitting at £45,000 and facing a 53% marginal tax rate, you’ve got, say, student loan repayment, pension contributions on that as well, you could be taking home as little as 30p in the pound.

“So the incentive to go for promotion, work more hours – it’s going to have an effect for that income range. We tried to capture that in our behavioural costing.”

Shadow finance secretary Murdo Fraser said the analysis “simply

confirms Nicola Sturgeon is imposing a tax on aspiration in Scotland”.

He said: “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.

“Nicola Sturgeon didn’t need to order this tax regime – she had the money to deliver a fair Budget for public services and taxpayers.”

Public finance minister Kate Forbes said it was “absurd to suggest that anyone will be paying tax at a rate of 70 per cent in Scotland”.

The SFC said the widening tax gap between Scotland and the rest of the UK would lead to some higher rate taxpayers changing their working hours or moving south.

This could hit income tax revenue by £13m in the next financial year.

However, it said this would only involve a small amount of earners, while freezing the threshold is expected to boost tax take by £68m.

It also said its figures did not take into account any other benefits from living in Scotland, such as free tuition fees and prescriptions.

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 or change their residency.”

SFC 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”.

Elsewhere, council leaders warned they are facing a cash cut as a result of the Budget.

Despite Mr Mackay boasting of a £210m real-terms rise in council funding in 2019/20, a new Scottish Parliament analysis said the core revenue settlement was actually falling in real terms by £318m.

Green MSP Patrick Harvie said the reason was central government ring-fencing large amounts of the money going to councils for government policies, such as free childcare.

“If they are national policies, they should be funded from national resources and not from a raid on council budgets,” he said.