Spending Review: Tax

More likely to be dragged into higher rate tax band

Income tax own pic
Scots taxpayers face a further tax hit

More taxpayers are likely to be dragged into the higher rate tax band as the threshold is frozen over the next four years, rather than increase in line with inflation, according to analysis of the Spending Review.

No tax changes were announced in Ms Forbes’ Spending Review and nothing was said about whether Scotland will follow the UK government and cut the basic rate of income tax to 19% as announced by the Chancellor.

This would mean that all but the lowest income tax payers in Scotland would pay more income tax than the same income earners south of the border, says David Phillips, associate director of the Institute for Fiscal Studies.

It would also widen the gap between taxes paid by middle and higher income Scots and those in the rest of the UK.

UPDATE 1 June: The Scottish Fiscal Commission (SFC) has forecast that 232,000 additional taxpayers could fall into the higher band by the end of the 2027/28 financial year.

The forecast is based on there being no change to the higher rate tax threshold, currently £43,633, as well as the basic rate, being frozen at 20%.

The Scottish Fiscal Commission says that freezing higher rate thresholds raises £500 million a year by 2026-27, as does a decision not to introduce the 19% rate.

If the Scottish Government instead chooses to increase the higher threshold and follow the Chancellor, its funding will be lower than assumed in the Spending Review, potentially necessitating further spending cuts.

Rates warning

Kate Forbes’s statement contained a hint that business rates may be raised. She states that “for the next revaluation to be revenue-neutral in 2023-24, based on current expectations about the tax base, an increase in the poundage would be required.”

She also refers to other levies and charges on business. One section refers to the need to “explore greater scope for discretionary revenue-raising, such as the Visitor Levy (tourist tax) and the newly created Workplace Parking Levy.”

Ms Forbes also suggests public bodies may raise their fees. “We will also expect public bodies within the scope of the review… who charge for services to identify ways to recover more of their costs,” she says.

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