‘Tax gap’ row highlights cracks between union
TORY Chancellor Philip Hammond’s Budget last week has thrown into sharp focus the diverging policy choices made by the UK and Scottish Governments on tax.
FOR the first 18 years of devolution, MSPs had the power to vary the basic rate of income tax, but they never took advantage of the opportunity.
Raising a rate paid by around two millions taxpayers in Scotland was not politically attractive as it applied to workers on modest means.
As a result of the Smith Commission, set up in the wake of the independence referendum, Holyrood was given full control of income tax rates and bands, with the exception of the tax-free personal allowance
The two Budgets last year – Mr Hammond’s in Westminster, and SNP Finance Secretary’s Derek Mackay’s statement in Edinburgh – showed that the Scottish and UK Governments had a different philosophy on income tax.
Mackay introduced a new 19p starter rate for low earners, while at the same time adding a penny on to the 20p, 40p and 45p rates. Hammond kept the three UK rates unchanged. His Tory colleagues at Holyrood accused the SNP of jacking up taxes.
But it is a different tax change that has dominated Holyrood this week and given rise to concerns of a talent brain drain from Scotland.
In trying to make progress towards meeting a Tory manifesto promise, Hammond last year raised the level at which taxpayers were liable for the 40p “higher” rate of income tax – from £45,000 to
£46,350. The policy was explicitly aimed at reducing the tax bills of middle-income voters.
Mackay, by contrast, only increased the higher rate threshold to £43,340, which meant taxpayers in Scotland would pay a bigger chunk of their income – nearly £3,000 – at the 41p level. The gap widened when Hammond raised the threshold from £46,350 to £50,000 last week. If the SNP Government maintains the allowance at £43,340 in its December Budget, workers earning £50,000 in Scotland will pay over £1,100 more in tax than their counterparts south of the Border.
Education Secretary John Swinney was informed last week that the tax gap could harm headteacher recruitment, but will the divergence lead to higherincome earners leaving Scotland?
Charandeep Singh, head of external relations at Scottish Chambers of Commerce, said it is critical that Scottish businesses are “able to attract and retain world-class talent”.
But while his organisation remained “alert” to tax changes which could have the “potential to further exacerbate the challenge of recruiting and retaining staff”, he did not predict a brain drain.
David Watt at the Institute of Directors also took a balanced approach. He said the IoD has a “real concern” about how higher earners are treated and added that politicians should be aware of the “risk of behavioural change” if people perceive they are paying “more than than their fair share of the pot”. However, he also said: “The other big point
for the IoD is how the tax take is spent and if it is considered to be wisely [spent] then there may be some support for increases in taxation.”
Colin Borland, director of devolved nations at the Federation of Small Businesses, said that for most small business owners being caught out by where the higher rate of income tax kicks in “is a problem they aspire to have”. He explained: “Under a quarter of them are higher rate taxpayers [23 per cent]. About two-thirds [65 per cent] are basic rate taxpayers and only 1.6 per cent pay the additional rate. So, their concerns about rising taxes aren’t so much about their own pockets, as their customers’ and the effects on the wider economy.”
Dr Lewis Morrison, chair of BMA Scotland, which represents doctors, said it is for governments across the UK to make tax decisions that reflect the priorities of the public.
Rather than citing income tax changes, he said years of “real terms pay cuts” was the issue for doctors: “Our priority would be the reversal of this trend and a pay and reward package – including pension contribution arrangements – ensuring Scotland is able to recruit and retain doctors it needs.”
And Tracy Black at CBI Scotland spoke in general terms about the differing tax policies.
She said competitiveness required a “full of suite of interventions” and urged Scotland to develop its workforce, deliver first-class infrastructure and invest in R&D. She added that local businesses will be “wary” of any moves that “widen divergence between Scotland and the rest of the UK” as the firms will fear it could make the country less attractive to investors and talent.
The tax gap row will rumble on into Mackay’s Budget and will give the Tories ammunition to fire at the SNP at the next Holyrood election. But the groups who represent some of the taxpayers affected by the change, while expressing concern, offer a less alarmist analysis than some of the politicians.