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Scottish government weighs up income tax options ahead of Draft Budget 2018-19

Scotland’s First Minister, Nicola Sturgeon has laid out all possible options for the country’s income tax rates in the years to come ahead of negotiations regarding the upcoming Draft Budget 2018-19.

The Draft Budget 2018-19 will be published on Thursday, 14th December 2017, subject to parliamentary approval, as confirmed in a letter to the Finance and Constitution Committee from Finance Secretary, Derek Mackay.

In order to commence discussion about future income tax rates, Ms Sturgeon announced a discussion paper, posing ‘touch questions’ about rises.

The National Audit Office (NAO) revealed earlier this week that more than half-a-million Scots are paying higher taxes than elsewhere in the UK following recent Budget changes approved by the SNP. For the first time, Holyrood took full control over Scotland’s income tax rates and thresholds in 2016 and the Scottish government agreed to hold the 40% income tax threshold at £43,000, leaving the average taxpayer in Scotland £213 worse off per year than other British taxpayers.

Mr Mackay said of the discussion paper: “I am seeking a well-informed and considered debate on the use of our powers, recognising that in a parliament of minorities common ground on tax must be found to secure a budget for Scotland.

“We have therefore set out alternative approaches for discussion, that we believe could better meet the four tests we have established.”

What do the income tax proposals include?

  1. Three core tax bands – increasing the higher and additional rates of income tax to 41% and 46% respectively, with the basic rate remaining unchanged at 20%
  2. Four core tax bands – introducing a new income tax band for low earners set around the median income, taking 20% on earnings between £11,850-£24,000, 21% on earnings between £24,001 and £44,290 and 41% on earnings between £44,291 and £150,000
  3. Five core tax bands – cutting the existing higher rate tax band at £75,000, with earnings up to £44,290 taxed as in Approach 2, with 41% taxed on earnings between £44,291-£75,000, 42% on earnings between £75,001-£150,000 and 50% on earnings above £150,000
  4. Six core tax bands – introducing a further 19% tax rate on earnings between £11,850-£15,000, with 20% on earnings between £15,001-£24,000 and other rates and bands adopting Approach 3

A spokesperson for the Federation of Small Businesses (FSB) said it “seems obvious” that the First Minister was “softening the ground for an [income tax rate] increase”, and that the FSB was “as yet unconvinced that taking more through income tax is the right move for the country”.

Moira Kelly, chair of the Scottish technical committee, Chartered Institute of Taxation (CIOT), believes the Scottish government risks encouraging the nation’s highest earners to relocate outside of Scotland and incentivising self-employed firms to become limited companies if it advocates an income tax regime that’s markedly different to elsewhere in the UK.

“Even if a political consensus emerges in favour of major changes to income tax in Scotland, these policy decisions cannot be considered in isolation from the wider UK tax regime,” said Kelly.

“A markedly different income tax regime north of the border may, for example, incentivise self-employed businesses to incorporate in order to shift their liabilities from higher rates of Scottish income tax to lower rates of UK-wide corporation and dividend taxes.

“Similarly, in the case of very high earners, it shouldn’t be ruled out that those people could choose to relocate to other parts of the UK or elsewhere if significant amounts of tax were at stake.”

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