Ross Stupart

Written by: Ross Stupart

Ross Stupart

Partner

Tax policies of our next PM and the impact on Scotland

Boris Johnson’s plans to raise the tax threshold for higher earners to £80,000 (approximately the basic annual salary of a MP) is clearly good news for those that are currently earning over £50,000. He plans to pay for this by increasing employee national insurance contributions and redeploying funds set aside to facilitate Brexit. On the face of it, the threshold for higher rate taxpayers in Scotland would not change as the powers over income tax rates and thresholds in Scotland are devolved to Holyrood. But the increase in national insurance contributions to absorb the cost of the income tax giveaway would hit Scottish taxpayers and therefore will leave Scottish taxpayers worse off. 

However, analysis from the Institute of Fiscal Studies (an independent think tank) has noted that Scotland would benefit from a higher block grant from Westminster due to such changes; so, although individual taxpayers would be hit, the country as a whole would benefit – adding more into the pot to pay for public services or indeed bridging the budget shortfall that was recently identified by the Scottish Fiscal Commission. 

The bigger issue would be the further divergence between higher taxpayers in Scotland and the rest of the UK and the impact this may have on Scotland’s ability to retain talent, as the higher rate of tax would kick in at £43,430 for Scottish taxpayers and £80,000 in the rest of the UK, if these plans were approved. And this is a key point, the announcement has generated a lot of debate and reaction; but with the current parliamentary make-up, whether tax policy that acutely hits middle earners in one jurisdiction would be capable of making it through the parliamentary process is unlikely, so this could be another Boris ‘red bus’ moment. 

Jeremy Hunt’s tax plans focus on businesses rather than individuals. He is proposing cutting corporation taxes to 12.5 per cent which would mean the UK would match the corporate tax rate of Ireland and have one of the lower corporate tax rates in the world. Mr Hunt’s strategy is directed at provoking economic growth, with the theory being that if businesses have less tax to pay more businesses will be attracted to the UK and they will invest more, particularly in people, which will ultimately produce more taxes for the exchequer. However, despite the UK corporate tax rates regularly falling from 28 per cent since 2010 there is some evidence to suggest that UK business investment has lagged behind other developed economies which casts some doubt on whether Mr Hunt’s strategy will be fulfilled. 

From Scotland’s perspective, as corporate tax rates are set by Westminster, so Scotland would become a low tax option for foreign investors just like the rest of the UK therefore Mr Hunt’s tax policy plans on the face of it would not cause any further divergence between Scotland and the rest of the UK. As with Mr Johnson’s policies however, the parliamentary make-up could create a barrier to Mr Hunt implementing as many of the other major parties have suggested that they would support freezing or increasing corporate tax rates. 

All of this therefore begs an important question. Whoever takes the top job, with the current parliamentary make-up, tax policy that acutely hits or benefits one demographic within our society – whether its higher earners, lower earners or corporates - is unlikely to be approved, so these campaign-based tax proposals could have little impact to the UK’s future.

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