RSM comments on new tax powers in Scotland

Commenting on the transfer of new tax powers from Westminster to Holyrood, Stephen Hay, RSM’s Head of Tax in Scotland, said:

‘The new tax powers mark a significant milestone for the Scottish government, given it the ability to set income tax rate and tax thresholds from April 2017. The question is what effect this will have on future tax policy, and whether we will see significant changes in the forthcoming Scottish Budget.

‘We could see a rebalancing of the tax system in Scotland, as we currently have a higher rate of tax compared to the rest of the UK particularly on the basis that the uplift in the 40 per cent tax band threshold will be lower in Scotland than in the rest of the UK. Following the Autumn Statement 2017, we know the new Chancellor Philip Hammond will stick to the plan made by his predecessor to increase the personal allowance to £11,500, and the higher rate threshold to £45,000 from April 2017; and he reconfirmed the commitment to increase both thresholds to £12,500 and £50,000 respectively by the end of the Parliament.

‘What this means in real terms is that taxpayers in England, Wales and Northern Ireland who meets the £12,500 threshold will take home an extra £300 on an average £25,000 salary in four years’ time and about £1,400 for anyone earning between £50,000 and £100,000. In Scotland we do not have the luxury of the higher threshold increase, but Scottish Finance Secretary Derek Mackay could look to implement a similar increase to offer some reprieve for Scottish taxpayers.

‘In his first address Mr Mackay might be bold and could review and overhaul the current system of income tax rates which puts individuals in a very unsubtle 20 per cent, 40 per cent and 45 per cent tax brackets. There’s no reason why, with the benefit of modern technology, he could not introduce a system of multiple rate bands running from between 20 per cent to 45 per cent. This might achieve far greater social benefits without the cliff-edge effects of the current system.

‘And what about the 50p tax rate? The SNP would like to introduce a new 50 per cent tax rate but has held off due to the fear that those who fall into the higher tax band will migrate to a different residence to avoid the 5p uplift. It will be interesting to see whether the new powers and the need to generate more tax revenue will change this stance and, in turn, future tax proposals

‘Indeed, with a growing deficit, increased fiscal pressures and uncertainty surrounding Brexit, there could be grounds to be even braver and rather than just redistribute, Mr Mackay may look to increase taxes across Scotland to fill the gap, which would ease the fiscal pain but hit the pockets of Scottish taxpayers.'