The Scottish Budget issued on 14 December 2017 proposed some radical changes to the income tax regime for Scottish taxpayers from 6 April 2018. While attention has been focussed on the implications for individuals on the receiving end of potential tax increases that raise the tax take from Scottish income tax, the knock-on effects for business across the UK cannot be underestimated.
Employers to take the strain?
On a daily basis there are reports of the issues facing families across the UK managing on tight budgets and the effects that austerity measures are having on the economy. Whilst modest tax reductions are intended for lower earners, Scottish taxpayers earning more than £33,000 will pay more tax from April 2018 than they do now, reducing net incomes. The pressure is therefore likely to be on employers during wage negotiations to increase gross salaries of those adversely affected to compensate. For such individuals, the London weighting comparison would be an easy one to make, particularly for those with UK wide employers. Combining that potential increase with the increase in minimum auto-enrolment pension contributions coming into force at the same time and for larger employers, the apprenticeship levy on top, wage bills are likely to rise substantially.
At the other end of the spectrum, much has been written about the possibility of highest earners moving their residence to another part of the UK to avoid the increase. Some may well be considering this, but for the majority, as well as those stretched middle earners, the upheaval of moving, particularly when children and schooling are involved, may well outweigh any available tax saving. Again, the employer might be expected to make up any shortfall in net incomes.
The challenge will come for businesses seeking to recruit new talent; either within Scotland or from other UK locations. The change to a more progressive tax system with additional rate bands may just be the start of a process which will see the 30 per cent of Scottish taxpayers earning more than £33,000 gradually paying proportionately more of the Scottish income tax collected than currently. Will this deter those considering a move north of the border? To attract the skilled employees needed for future Scottish economic growth, businesses may find themselves having to offer more attractive packages than they might otherwise have done.
The danger for the Scottish economy is that while the increases might not be enough to encourage individuals to move, some businesses might find it cheaper to be located in England, with the potential for job losses in Scotland from relocation or branch closures. The Scottish Government does not currently have control over the other pieces of the tax jigsaw, such as corporation tax and national insurance contributions, that would allow it to attract businesses in other ways.
The Scottish Budget is still being debated with some opposition parties claiming the proposals do not go far enough, so what the final position will be is not yet clear.
What is clear is that with devolved taxes for Wales and Northern Ireland on the horizon, tax competition between the component parts of the UK seems inevitable.
For more information please get in touch with Shirley McIntosh, or your usual RSM contact.