The Scottish finance secretary has already provided full details of the consultation on the income tax policy which Scotland may adopt from 6 April 2018. While all the facts and figures provided by the Scottish Government in the consultation document will need to be verified by the Scottish Fiscal Commission, it is now obvious that there will be tax increases for almost half of Scottish taxpayers.
The most likely scenario is that Scotland will adopt a progressive tax system moving away from the three tax bands to meet the systems favoured by most other OECD counties, plus tax increases within these bands – highlighting a progressive approach and significant divergence from the UK system for the first time.
Looking at the recommendations, we can expect that tax will increase for those earning more than £24,000 with small percentage increases at each rate band. An increase of 1 per cent at £24,000 to £44,000 looks certain. Scottish taxpayers in that earnings range will be able to do little to mitigate that additional liability.
A further increase of 1 per cent from £44,000 upwards is likely with a ceiling of either £150,000 or £75,000 depending on whether a four or five rate bands are introduced. Under a five rate-band regime we could see a further 1 per cent increase to 42 per cent on those earning between £75,000 and £150,000. But many of those tax payers will be able to mitigate this increase as they are likely to be owners of small companies who could take a dividend instead of salary to reduce their tax liabilities, which would ultimately have the opposite desired effect and decrease the tax take in Scotland.
Those earning £150,000 or more seem set for a 3-5 per cent tax increase for earnings over that amount. This is unlikely to cause many to leave Scotland, with a 5 per cent increase on someone earning £200,000 each year being £2,500. However a £1m salary would an extra tax bill of £42,500. But, how many Scottish taxpayers earn more than £1m?
All indications lead to Scottish middle and higher-earners facing a tax hike in April 2018, but will Derek Mackay take this bold step and resist calls from businesses to avoid further trading turbulence? All will be revealed this Thursday.
In addition, could this be the catalyst for more progressive tax regimes in England, Wales and Northern Ireland? Other tax jurisdictions will be watching carefully to see whether this gamble pays off. If successful, the UK could be set for a more progressive tax overhaul.
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