Is new Scottish tax just the tip of the iceberg?

22 Feb 2018

calculator and paperwork

The Scottish Government has distanced its taxpayers from the rest of the UK with a significant change in the tax rates and bands that will apply to the Scottish taxpayers, but are these changes just the tip of the iceberg?

What we have now is a major step away from the tax rate bands in the rest of the UK with the introduction of five different bands for Scottish taxpayers, with top rate taxpayers paying 46%. Now that a precedent has been set for changing tax rates, the concern is that this may lead to more radical changes to Scottish tax rates over the next few years. Certainly it must pose questions in the minds of high earners considering whether to come to Scotland or even stay in Scotland.

The requirement to pay Scottish tax rates depends on the residence status of the taxpayer rather than the source of income, so if they live south of the border, then they will pay UK rates even though they work for a Scottish firm. It is only those who reside in Scotland who will pay Scottish income tax.

The proportion of adults in each category can be summarised as follows:

  • Basic rate taxpayers – 2.2 million
  • Higher rate taxpayers – 346,000
  • Additional rate taxpayers – 20,000
  • Do not pay income tax – 2 million

Scottish basic rate taxpayers will be £787 worse off than their English neighbours and the difference increases for those who earn more. For those whose income is just below the top tax rate, the difference increases to £1,942. Some will see these changes as insignificant, but it is the unknown future of Scottish taxation which will worry people more, as the government strives to finance its spending. And will the complex new five-tier tax system for Scotland actually cost more money to implement than it raises?

The increase in tax for those earning over £33,000 may just be the start of even higher taxation for the squeezed middle earners who are also facing higher prices as inflation rises. Unless they reduce public spending, the Government’s only option is to increase taxation. But people will only take so much – especially those with expanding families and bigger bills, who are not well off, and who are struggling to cope, and who now have to pay more tax, with further increases possibly on the horizon. There is also potentially a double hit on the higher earners as private schools will no longer be eligible for charitable relief from business rates which may lead to higher school fees.