Budget 2016: Income tax

Scottish government faces choices on tax thresholds

Sharon BlainThe Chancellor last week unveiled plans to increase the higher rate threshold to £45,000 from April 2017, and with income tax now a devolved matter, there is growing speculation about what this might mean for workers north of the border.

We’ve already seen broad hints from Scottish Labour and the SNP that the increase in the higher rate threshold would not be implemented.

As a result, we could see Scottish higher earners pay a different amount of tax from their counterparts in the rest of the UK.

For the vast majority of Scotland’s 2.5m taxpayers, this currently isn’t an issue as 85% of income tax payers in Scotland have earnings below the current threshold and therefore only pay the basic rate – currently 20% across the UK including Scotland.

There are however a further 400,000 higher rate taxpayers, and 17,000 additional rate taxpayers (based on HMRC figures) who would be affected if our new Government (after they are elected in May) chose not to implement the rise announced by the Chancellor.

While this is a small proportion of the population, there are many people just under the threshold and many who aspire to earn the salaries that come with the larger tax impact.

If the Scottish Government decided to keep the 2016/17 threshold of £43,000, this would mean Scottish workers earning more than that paying up to £400 extra income tax than if they lived elsewhere in the UK.

And there is potential for this difference to increase in later years as George Osborne has spelt out plans to raise the threshold to £50,000 – as much as £1,400 a year extra in income tax.

If the Scottish Government chose to increase the higher rate threshold in line with inflation, this difference would narrow. When coupled with the increases in Council Tax for homes above Band D, this could see household incomes take a significant dip.

IPPR Scotland estimates that raising the threshold in line with inflation would give the Scottish government up to £300m extra tax revenue p.a. by 2020 without having to raise tax rates (compared to following the planned UK rise).

If a divergence in tax position for employees occurs, it will present challenges for businesses and the public sector in attracting new talent to the country – even more so considering that earnings in Scotland are lower than across the UK as a whole.

Against this backdrop, firms would need to consider how they compensate for people potentially having different take-home salaries in different parts of the UK.

This isn’t just going to be an issue for individuals. It will also impact upon companies who will need to ensure packages are competitive with the rest of the UK to retain high-quality staff for their needs.

Sharon Blain is a senior tax manager for PwC in Scotland

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