A progressive future for income tax? The effects of cutting income tax for higher earners in Scotland

The Scottish Government begins the budget process for Scotland on the 12^th December, publishing its draft budget for 2019/20. This will see the Scottish Government set out its plans for devolved taxes and spending in devolved policy areas for the coming year. The draft Budget will face parliamentary scrutiny over the coming months before being finalised, potentially with amendments, before the end of February. Given the make-up of the Scottish Parliament, and the minority SNP Government, the Scottish Government will need one or more opposition parties to back their plans. This briefing focuses on some of the implications of the UK Government’s income tax decisions for the Scottish government, and, in particular, the UK government’s decision to cut taxes for higher earners in the rest of the UK (rUK).

Scotland’s devolved income tax

Following the devolution of further income tax powers to Scotland in 2016 the Scottish government now has power to set income tax rates and thresholds for income tax in Scotland on earnings above the personal allowance (which is reserved to the UK government). The Scottish government used these powers, firstly in 2017/18 to hold the higher rate tax threshold (the point at which higher earners begin to pay the higher rate of income tax) lower than in rUK. While not a tax increase in cash- or real-terms, this meant higher earners in Scotland did not receive a tax cut that higher earners in the rUK did. For 2018/19, in last year’s budget, the Scottish government made more significant changes to the devolved income tax system in Scotland. This saw the introduction of two new income tax bands, and increase in tax rates for higher and additional rate tax payers. Overall this saw reductions in income tax for lower earners and increases in taxes for higher earners in Scotland. This means Scotland now has a very different income tax structure to the rest of the UK (rUK).

Choices for 2019/20

For 2018/19, Scotland’s higher rate tax threshold stands at £43,430, compared to the rUK threshold of £46,000. At last month’s UK budget, the Chancellor announced the higher rate income tax threshold in rUK is set to rise to £50,000 from April 2019. This constitutes a further tax cut for higher earners in rUK– and takes an opposite direction to the Scottish government’s income tax choices so far. Ahead of the publication of the Scottish government’s draft Budget, there is a clear choice before the Scottish government in relation to how to respond to an increasing differential in the income tax paid by higher earners in rUK against that paid by higher earners in Scotland.

The Scottish government remains publicly committed to a progressive income tax agenda. Scotland’s Finance Secretary Dereck Mackay has promised to take “a more progressive approach” to income tax than UK Chancellor Philip Hammond in Scotland’s 2019-20 budget.[1] One of the key decisions facing the Scottish Government for this coming year is how much income higher earners can make before higher-rate tax rates kick in.

How much would it cost to match the UK government tax cut for higher earners?

Table 1 below shows the baseline assumption for Scotland’s higher rate tax threshold[2] uprated with inflation as against the new plans for rUK taxpayers announced by the UK government in the Autumn Budget 2018.