Danny McCance 21 Feb 2019 10:47am

Scotland’s plan to freeze tax threshold criticised

Scotland could break from the UK by freezing its higher rate tax threshold

Although income tax rates – voted on in Scottish parliament yesterday and set to be confirmed in today’s Budget ¬– remain unchanged, the freeze on the higher rate threshold of £43,430 is £6,570 less than that in the UK.

“If you earn £50,000 you’re looking at paying £1,544 more in Scotland than you would in the rest of the UK,” said Carl Bayley, tax expert. “Is that enough to make people leave?”

“What concerns me more though is that it stops people coming,” he continued, pointing to the risk posed to the Scottish economy in failing to attract talent.

The move is supposed to be beneficial for lower earners, as 55% of Scottish taxpayers should pay marginally less than those in the rest of the UK, according to the Scotsman.

Speaking to parliament, finance minister Kate Forbes said, “Now is not the time to pass on the UK government’s tax cuts for the highest earners,” the Scotsman reported.

“The decision on tax that we have taken has enabled us to mitigate the decade-long bite of austerity that’s been inflicted by the UK government on our resource budget and to continue to invest in our public services, in our people and in our businesses,” she added.

However, the concerns are that it is the higher earners, who contribute proportionally more, that the government is at risk of losing.

Alexander Garden, chair of the Chartered Institute of Taxation’s Scottish technical committee, said tax increases for this group could lead them to “seek steps to legitimately limit their tax liabilities”.

Higher earners, he said, account for 60% of devolved income tax revenue, despite making up less than 15% of all Scottish taxpayers.

They could end up paying less by, for example, reducing pensions contributions or limiting the amount of hours worked.

There is also an added risk to the Scottish government of self-employed individuals incorporating their businesses.

The difference between paying income tax being self-employed and paying corporation tax through an incorporated company is twice as much if you live in Scotland, Bayley noted.

In addition, the corporation tax paid will not go to the Scottish government, but to the UK government, as will the taxes paid on dividend payments.

Bayley added that the Scottish government “should be seriously concerned about that” as it is not just that individuals are reducing the tax that they pay, but that “they’re taking all the tax away from Scotland”.