Pivotal moment in Scotland as new tax reform gets the green light

Responding to today’s Scottish rate resolution debate and the decision to pass the motion, Stephen Hay, RSM’s head of tax in Scotland, said:

‘Today’s decision, although not unexpected, signals a pivotal moment for Scotland. Not only will the decision pave the way to introduce a five rate system for the first time, but it presents further tax divergence between Scotland and the rest of the UK.

‘Due to the fiscal backdrop in Scotland, a need to generate more tax revenues was the driver of change and the announced tax rate bands at 19p, 20p, 21p, 41p and 46p will indeed raise £219m more than the current system.

‘The decision will mean 45 per cent of taxpayers in Scotland will pay more than their counterparts in the rest of the UK as the Scottish government has added a 41p tax rate (one percentage higher than the top rate in the rest of the UK) and an additional 46p tax band. On the other hand, today’s decision also sees 55 per cent of Scottish taxpayers paying less than the UK, confirming that middle and higher earners will take the brunt of the tax hikes.

‘But what’s changed since the original announcement in December. First, Derek Mackay has also lowered the threshold of the 41p tax band to £43,430 which will correct an irregularity from the original proposals where taxpayers who earn between £43,525 and £58,500 would have paid less tax rather than more, which will raise a further £55m. In addition, the Scottish Finance Secretary confirmed that the marriage couple allowance will still remain for taxpayers within the three lowest tax bands.

‘The historical move towards a more progressive tax framework should be commended but it does present another level of complexity for HMRC to process Scottish taxes and the Scottish Government will have to foot the bill for the additional administration so the net gain will be reduced.

‘Which begs the question, do the plans go far enough to support public services, economic growth, home owners and Scotland’s fiscal health? The additional £219m only just covers the decrease in block grant funding at £200m so Scotland will effectively breakeven; and it will make little impact on the growing deficit which sits at £12bn. Now the bold step has been taken to use the devolved powers and add additional tax bands; could we see further tax increases in the future to make up the shortfall?