Scots face highest income tax bills in UK
Most workers in Scotland face paying more income tax than those in the rest of the UK unless the Scottish Government follows the Chancellor’s lead and scales back various rates from 2024.
Rishi Sunak announced in his Spring Statement that the basic rate of income tax will be cut from 20p to 19p in the pound by the end of the parliament.
He also raised the threshold on national insurance by £3,000 from July to align with the income tax personal allowance.
The £5 billion income tax cut for workers, pensioners and savers from 2024 will be worth £175 on average for 30 million people in England, Wales and Northern Ireland and will be the first cut to the basic rate in 16 years.
Income tax rates are devolved in Scotland and the Scottish Government’s funding will be automatically increased as a result of this tax cut by £350 million in 2024-25.
However, it will be a political decision for the Scottish Government whether to cut rates to match Mr Sunak’s plan.
Steven Cameron, pensions director at Aegon said: “Scottish taxpayers pay different tax rates on different bands of earnings compared to the rest of the UK, as the Scottish Government has chosen to use this devolved power.
“From 2024 these disparities could widen even further when the basic rate on income tax falls from 20% to 19% for the rest of the UK.
“Unless the Scottish Government follows the UK’s Government’s lead and scales back various rates, from 2024 everyone in Scotland earning above £14,732 will be paying more income tax than those resident in the rest of the UK.”
Daniel Hough, financial planner at Brewin Dolphin, also noted the growing income tax disparity north and south of the border: “The introduction of a 19% basic tax rate in the rest of the UK before the end of this parliament could mean more people in Scotland paying more tax than their equivalents elsewhere in the country. In fact, below average earners in Scotland will be worse off,” he said.
“This could put pressure on the Scottish Government to reassess the current 19%, 20%, and 21% bands north of the border and bring them more in line with the rest of the UK.
The Chartered Institute of Taxation said further divergence would result in no Scottish taxpayers paying less income tax than their counterparts in the rest of the UK.
It points out that the SNP’s election manifesto in May last year pledged to freeze rates and bands of income tax for the duration of the 2021-26 Scottish Parliament.
Kate Forbes, the Scottish Government’s Finance Secretary, issued a statement stating that Scotland already had a lower rate.
“On taxation, we have already acted to introduce a 19% starter rate of income tax below the basic rate, in line with our commitment to progressive taxation, which makes Scotland the fairest taxed part of the UK,” she said.
However, as she said, this is a starter rate and applies only to earnings between £12,570 and £14,732. Earnings between £14,732 – £25,688 are taxed at 20% and between £25,688 and £43,662 at 21%.
Mr Sunak proposes England moves to 19% on the entire earnings band currently between £12,750 and £50,270.
NI threshold raised
Following his decision to raise the national insurance threshold, Mr Sunak said: “From this July, people will be able to earn £12,570 a year without paying a single penny of income tax or National Insurance.”
He described this as “the largest increase in a basic rate threshold ever, and the largest single personal tax cut in a decade.”
He rejected calls to drop plans to raise national insurance contributions from next month by 1.25%, stating that the levy will provide vital and immediate funding for NHS and social care.
However, 70% of workers who pay NICs will pay less, even after accounting for the levy. Of those who benefit from the threshold increase, 2.2 million people will be taken out of paying NICs altogether.
It means people earning up to about £34,000 a year will be better off. Someone earning £20,000 will pay about £180 less National Insurance this year than last year, while someone earning £50,000 will be paying about £200 more.
Mr Sunak made no reference to calls for a windfall tax on oil and gas company profits. He said he wants to encourage training, investment and innovating and will reform the tax credits firms spend on research and development.
Taxes will be cut on business investment, with details to be set out at the Budget in the autumn. Small firms will benefit from a £1,000 increase in the Employment Allowance to £5,000.
As a result, 50,000 of these businesses will be taken out of paying NICs and the Health and Social Care Levy, taking the total number of firms not paying NICs and the Levy to 670,000.
Ahead of the end of the super-deduction next March, the government will work with businesses and other stakeholders to consider cuts and reforms to best support future investment.
The Chancellor announced that he will cut business rates for businesses in the English hospitality, leisure and retail sectors by 50% next month – the biggest cut to business rates outside of coronavirus and worth £1.7bn.
This mean a saving of £5,200 for the average pub, with a rateable value of £21,000; the average convenience store, with a rateable value of £28,500, will save £7,000; and the average cinema, with a rateable value of £95,500, will save £24,000.
The devolved administrations will be pressed to follow suit.
Mr Sunak confirmed a 5p per litre cut in fuel duty while taxes will be cut on business investment, with details to be set out at the Budget in the autumn. Small firms will benefit from a increase of £5,000 in the Employment Allowance.
The RAC said the fuel duty cut will wipe £3.30 off the cost of filling a typical 55-litre family car.
Households installing solar panels or heat pumps will see VAT on energy saving materials cut from 5% to zero for five years. Mr Sunak said these measures equated to a tax saving of roughly £1,000 and a saving of approximately £300 on energy bills.
Labour’s Shadow chancellor Rachel Reeves called Rishi Sunak’s tax cutting claims “increasingly incredible”.
She said: “He seems to have taken inspiration from Alice in Wonderland. Or Alice in Sunakland.
“Sunak is giving people £200, but asking for it all back. He says he believes in lower taxes, but taxes are going up.
“Alice would ask, do lower taxes mean higher taxes? It is like Alice in Wonderland: ‘When I use the word, it means just what I choose it to be.’
“Sunak is living in a different reality.”
Ms Reeves criticised the chancellor for “continuing to defend” the “record profits” of oil and gas producers.
“Even they themselves have more money than they know what to do with,” she said. “And it is British people who are paying out”.
Liberal Democrat Treasury Spokesperson Christine Jardine said: “Rishi Sunak has failed to introduce a windfall tax on the super profits of oil and gas producers, which could have raised billions to help people with their energy bills.
“And he has refused to bring in an emergency cut to VAT, as Liberal Democrats have called for, which would put £600 back into the pockets of the average family.”
Tony Danker CBI Director-General, said: “The Chancellor has taken steps to sustain confidence in our economy. They are welcome but don’t do enough to tackle the current challenges facing firms.
“In reality, we cannot wait until October to get growth going. The Government needs to get moving straight away.”
Shevaun Haviland, Director General of the British Chambers of Commerce, said: “The Spring Statement falls short of the action businesses needed to see today. While there are some positive announcements that firms will welcome, it did not fundamentally address the huge cost pressures they are facing.
“Businesses will be pleased that the employment allowance has been increased. This long running ask of the BCC will provide a small amount of financial headroom for firms facing rising costs.
“But today was a missed opportunity to rebuild and renew the economy and ensure business has the resilience to weather the uncertain and volatile times ahead.”
On the NI threshold: Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey said: “By lifting the threshold, care must be taken that workers earning less than £12,570 per year do not lose access to vital National Insurance credits for state pension.
“The state pension forms the backbone of most people’s retirement and therefore, they should ensure they do not incur gaps unnecessarily, that mean they end up with less in retirement.”
On fiscal targets: Stephen Millard, deputy director at the National Institute Of Economic And Social Research, said: “Increasing tax receipts in the months leading up to the Spring Statement enabled the Chancellor to cut fuel duty and increase support for households while still keeping to his fiscal targets.
“But, higher inflation, rising interest rates and lower growth could soon lead to a need to either abandon the targets or raise taxes going into the next election.”