Warning top earners could leave as tax rises are backed

Gap with England widens to £1,500 a year after Holyrood votes for changes

HOLYROOD has voted to widen the middle class tax gap with England to £1,500 a year, despite experts warning it could lead people to quit the country and reduce revenues.

Just hours after the Chartered Institute of Taxation warned of tax flight because of higher bills in Scotland, MSPS voted by 61 to 52 to bring in the change from April.

The SNP was the only party to support the Scottish Rate Resolution, the legislation that sets income tax rates and thresholds and is an essential part of the 2019/20 Budget.

Labour, the Conservatives and Liberal Democrats opposed it, while the Greens abstained.

All those earning more than £26,990, about 45% of all Scots, will now pay more than their counterparts south of the Border, with higher rate taxpayers at least £1,500 worse off.

The threshold for the higher rate of income tax will be frozen at £43,430 in Scotland, dragging ever more taxpayers into the 41p band as a result of rising wages.

Meanwhile, in England and Wales, the threshold will rise to £50,000, giving high earners there a tax cut; the rate will also be a penny lower, at 40p in the pound. The changes are forecast to raise an extra £68 million in Scotland.

The upper limits for the 19p starter and 20p basic rates will also be raised by inflation to give low-paid workers a tax cut of about £10 next year.

The vote at Holyrood followed the Chartered Institute issuing its gravest warning yet over the possible impact of having diverging income tax rates on either side of the Border.

It said that although only 15 per cent of Scottish taxpayers pay the higher rate, they account for 60% of the £11.5 billion raised in income tax, so if more of them tried to avoid tax it would have a disproportionate effect on revenues, and hence the funding for public services.

The Institute said high earners could cut their work hours, divert more income into pensions, incorporate as businesses, or simply leave Scotland to save money.

Alexander Garden, chairman of the Institute’s Scottish Technical Committee, said: “As the tax bills for

those paying the higher and top rates of tax increase relative to the rest of the UK, there are concerns that some of those taxpayers will seek 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.

“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 be a more attractive option.

“Higher earners, or those with greater mobility, may even choose to relocate away from Scotland.”

The concern was echoed by one of the SNP’S own MSPS before the vote at Holyrood.

John Mason, a former accountant who represents Glasgow Shettleston, said: “We have to tread carefully with tax like income tax, where residence can be changed fairly readily.

“The last thing we want to do is lose taxpayers from Scotland, and subsequently lose all of their tax to the rest of the UK or anywhere else.”

But SNP public finance minister Kate Forbes insisted the tax regime provided stability, and said the choices reflected years of Westminster austerity squeezing Holyrood’s budget.

She said: “Our tax policies will ensure 55% of taxpayers continue to pay less than if they lived elsewhere in the UK. Now is not the time to pass on the UK Government’s tax cuts for the highest earners. The decisions this Government have made have to be seen in the context of the UK Government’s continued pursuit of budget cuts.”

David Lonsdale, director of the Scottish Retail Consortium, and a frequent government critic on tax, was also supportive.

He said: “Household finances are being buffeted by headwinds including rises in the legal minimum that must be put into pensions and inflation-busting council tax increases.

“The decision to rule out further rises in income tax rates and protect those on modest and low earnings is the right approach and will support consumer spending.”

Tory MSP Murdo Fraser said a real terms increase of £521m in the Scottish block grant from Westminster in 2019/20 meant there was no need to widen the tax gap.

He said: “The SNP has broken their repeated promises to Scottish taxpayers. Thanks to the SNP taxes, everyone earning over £26,990 a year, ordinary hard-working families, will pay more in tax in Scotland that others pay in the rest of the UK. Businesses have repeatedly warned that this tax divergence will be bad for the Scottish economy.”

Willie Rennie, leader of the Scottish Libdems, said: “Our priority for this budget was for greater investment in local councils, mental health and teachers pay. Unfortunately, the SNP chose to continue to put independence first.”

The final vote on the 2019/20 Budget is tomorrow.