So with tax rates frozen and no new additional rate bands, the tax raising landscape in Scotland looks very much like the rest of the UK except for one change - the higher rate tax threshold. While the rest of the UK will enjoy an increase to £45,000 from 6 April 2017, Scottish taxpayers will have only an inflationary increase to £43,430 and inflationary increases for the remainder of the parliament. For those with income over £45,000 this means an additional £314 of income tax in Scotland compared with the rest of the UK next year, increasing to around £800 per annum by 2020.
This may sound a relatively small difference, but the wider implications of a divergence in income tax rates between parts of the UK should not be underestimated. It seems inevitable that workers will look to their employers to help them make up the shortfall by increasing salaries.
Businesses operating across the UK have long had to consider the impact of geographic differences in living costs on salary increases for staff. We’ve all heard of London weighting. But now, those businesses will also have to consider the impact of differences in tax rates on net earnings when moving staff around the UK or recruiting in different parts of the country.
And how will staff in Scotland react when their English counterparts are given a pay rise on moving to Scotland to take account of this reduction in net earnings? Wage inflation is looking more and more likely.
Let’s not forget Wales either. A fiscal framework has now been published which paves the way for some devolution of tax raising powers to Wales from April 2019.
And if that is not complex enough, what about National Insurance Contributions? The Upper Earnings Limit is now aligned to the income tax higher rate threshold. Power over NICs is reserved to Westminster, so which higher rate threshold applies in Scotland?
The Office of Tax Simplification has been tasked with considering how the interaction of income tax and NICs can be simplified and the two taxes potentially merged. However, deciding how that can be achieved within this partially devolved tax framework will be no easy task.
For more information please get in touch with Shirley McIntosh, or your usual RSM contact.