The potential gap in the differing amounts of income tax paid north and south of the Scottish border has grown substantially this week, after the chancellor raised the threshold at which 40% tax is levied – for those in England and Wales at least.
Since the start of this tax year, the Scottish government has had beefed-up powers to set some of its own income tax rates through its devolved powers.
Currently, Scots pay 40% tax on earnings in excess of £43,000, (up to £150,000) compared to the higher threshold of £45,000 in the rest of the UK. This means that someone earning £50,000 in Scotland currently pays £400 more this tax year that their English or Welsh counterparts.
And that differential is set to grow – unless the Scottish government chooses to close the gap at its own budget announcement on 14 December.
The chancellor Philip Hammond said on Wednesday that the higher rate threshold for non-Scots will increase to £46,350 from April. It leaves Scotland’s finance secretary, Derek Mackay, facing a dilemma – to either follow Hammond’s lead or stick with a policy that will generate high tax revenues for Holyrood. Scottish ministers have previously indicated that they want to raise money to end what they see as English-imposed austerity, and in particular the 1% cap on wage rises that has been imposed on public sector workers.
Accountants calculate that if the Scots keep the higher rate at £43,000, it would mean a £50,000 earner would then pay £670 a year more than a colleague on the same income, based in London.
And this could be just the start. Hammond has said he plans to ultimately move the 40% tax threshold to earnings above £50,000. In contrast, the Scottish first minister Nicola Sturgeon has blocked this in the past, arguing that it would be wrong to cut taxes for higher earners at a time of ongoing austerity.
Alan Turner, head of tax for KPMG in Scotland, says: “The budget highlighted the potential for further divergence on income tax between Scotland and the rest of the UK. Scottish taxpayers doubtless recognise that improved public services could require additional funding, but the extent to which they will accept a tax differential with the rest of the UK remains to be seen.”
Meanwhile, the other big measure in Hammond’s budget – the abolition of stamp duty for first-time buyers on homes worth up to £300,000 – will not apply in Scotland.
Instead, ministers have introduced the Land and Buildings Transaction Tax, which applies a levy of 2% on sales between £145,000 and £250,000, rising to 5% on sales between £250,000 and £325,000. Again, Scottish ministers will have to decide whether to introduce a similar stamp duty measure in Scotland.
Ruth Davidson, the Scottish Tory leader, this week warned there “is a growing tax gap between people in Scotland and elsewhere in the UK”.
Meanwhile, a Scottish government spokesperson says: “Taxpayers across Scotland get the best deal in the UK with a range of services and benefits which are not available elsewhere. The serious and growing economic threat posed by Brexit, coupled with continuing UK government austerity confirmed by the chancellor, means we are seeing increasing pressure being put on our public services.
“We have opened a discussion about how we protect these vital services and tax policies will be brought forward in the draft budget.”
