Commenting on the draft Scottish Budget 2016, Shirley McIntosh, Tax Partner at RSM, said:
‘In his first address the new Finance Secretary Derek Mackay focused on improving education, social services and public services with some significant funding pledges, but there was no surprises when it came to previously trailed income tax changes for Scottish taxpayers – which begs the question why did he miss the chance to fully exercise his devolved tax powers to help the Scottish government truly balance the books?
‘As expected Mr Mackay confirmed that he will limit the 40p higher rate income tax threshold increase to inflation. It will be £43,430 next year, while it will be £45,000 in the rest of the UK. This means higher rate taxpayers in Scotland will pay more income tax than in the rest of the UK. This difference, or divergence if you like, at the higher rate band threshold in Scotland to that in the rest of the UK, means that in the first year an extra £314 will be paid by approximately 400,000 Scottish taxpayers compared with their counterparts in the rest of the UK. And this inflation linked higher rate band threshold in will only diverge further as the UK government seeks to move the higher rate band threshold ahead of inflation in the rest of the UK. So, when the 40p higher rate threshold in the rest of the UK reaches £50,000, the same Scottish taxpayer on the same earnings of £50,000, will pay an extra £800 in income tax. This poses the questions as to how employers go about attracting and retaining talent in Scotland where employments taxes for what could be the same job are higher in Scotland than the rest of the UK. Will this decision further impact the tax take and indeed inhibit employers’ ability to fill the skills gap that many sectors are facing.
‘In addition, the taxpayer demographic is very different in Scotland compared to the rest of the UK and many have been calling for the introduction of new tax bands to rebalance the system. By pulling the available devolved fiscal levers available to him, the Finance Secretary could have shown both leadership and imagination by introducing a series of thresholds and rates between 20p and 40p that may well soften and broaden the impact of higher taxes and at the same time increase the overall income tax take in Scotland. This will be seen as a missed opportunity to achieve far greater social benefits without the cliff-edge effects of the income tax current system.’