Andrew Hubbard

Written by: Andrew Hubbard

Andrew Hubbard


The realities of tax devolution

  • March 2018
  • 3 minutes

Tax devolution in the UK is now very much a reality. In their different ways Scotland, Wales and Northern Ireland have their own powers to shape parts of the tax system in a way that meets the needs of their local economies. It is, of course, not our place to comment on the politics of this, but as the realities of tax devolution start to be apparent we do see UK-wide issues emerging which are likely to create problems if, as seems inevitable, further tax powers are eventually devolved. It is that phrase ‘in their different ways’ which gives us pause for thought. 

Take income tax. Northern Ireland has no powers; Wales will be able to vary the rates but not the rate bands or allowances, whereas Scotland now has powers to vary rates, bands and allowances. But even in Scotland that power is not limited. Holyrood has tax powers over earned income but not over savings income, which is taxed according to UK-wide rates. And even though earned income is subject to a separate regime in Scotland, National Insurance - which is closely allied to PAYE - remains a UK-wide charge.

The problem comes when this patchwork of different rates has to be accommodated within the UK tax system as a whole. Take as a simple example the Marriage Allowance. This is (ignoring some of the quirks in the small print) available to basic rate taxpayers. But now in Scotland there are two other rates - the starter rate (19 per cent) and the intermediate rate (21 per cent). So, individuals in these bands are no longer basic rate taxpayers and therefore would fail the eligibility test for the marriage allowance even though their earnings level would entitle them to the allowance elsewhere in the UK. But the marriage allowance is a UK-wide matter. So, a change to the structure of Scottish income tax meant that individuals north of the border would lose out on a UK-wide benefit, even though the UK government had not changed the eligibility test. Fortunately, this has been sorted out by a last-minute fix confirming that taxpayers within the three lowest tax bands will still receive the allowance, but an amendment to UK tax legislation was needed – which illustrates the problem. 

It would be possible for income tax in its entirety to be devolved to Scotland in the future, so that taxpayers there pay only Scottish income tax and are removed completely from the UK tax system, but politically I can’t see this happening within the foreseeable future. So, we are likely to be dealing with the consequences of partial devolution for many years. When you have two, perhaps eventually four, different bodies with power over parts of the income tax system it is almost inevitable that things will start to fall between the cracks. At the very least there needs to be a much more formal system under which issues such as these can be resolved properly in good time: last minute back room deals are not the way to run a modern transparent tax system.

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