Tax professionals have cautioned that plans to restructure Scottish income tax will introduce additional complexities for Scottish taxpayers, while warning that the new measures should not be considered in isolation from the wider UK tax and benefits regime.
Following weeks of speculation, the Scottish government announced yesterday the income tax changes that will see higher earners pay more than elsewhere in the UK – and lower earners pay less.
The country’s finance secretary, Derek Mackay, announced a new tax band of 21p for those earning more than £24,000.
The higher rate of tax will be increased from 40p to 41p and the top rate from 45p to 46p.
But a starter rate of 19p in the pound will also be introduced, Mr Mackay confirmed in his draft budget.
Mr Mackay said the move to a five-band income tax system will mean no one earning less than £33,000 in Scotland will pay more tax than they do now.
Revealing his plans in the his Budget announcement yesterday, he told the Scottish Parliament that those earning above that figure would only pay a “proportionate amount more” than they currently do.
His figures showed that 55 per cent of Scottish taxpayers will pay less compared to south of the border under the new system – with 45 per cent of people paying more.
Someone in Scotland earning £150,000 will pay £1,774 more than if they lived elsewhere in the UK, with someone earning £40,000 paying £140 more.
Yvette Nunn, Co-chair of Association of Taxation Technicians’s Technical Steering Group, said it was fortunate the Scottish Government said that they are planning to increase spending on education, “as Scottish taxpayers are going to need a good grasp of maths if they want to calculate their income tax for themselves in future.”
Reacting to the proposals, the ATT and the Chartered Institute of Taxation (CIOT) warned that they could see some middle-income earners paying a higher marginal rate of tax and National Insurance (NI) than those on higher incomes because of the misalignment between income tax and the Upper Earnings Limit (UEL) of National Insurance contributions.
The CIOT also said that the decision to introduce a new ‘starter’ rate of tax could pose complications for some people in receipt of benefits, while noting that the creation of an ‘intermediate’ rate could have implications for people in receipt of Marriage Allowance.
Moira Kelly, chair of the CIOT Scottish Technical Committee, said: “Complexity is the price Scots will pay for exercising our devolved powers over income tax. Today’s announcement underlines the increasingly diverging nature of income tax between Scotland and the rest of the UK.
“But even if a political agreement can be reached by Scotland’s political parties on the way forward, introducing new rates and bands of income tax cannot be considered in isolation from the wider UK regime.
“We are concerned that today’s proposals have the potential to increase both the costs and complexity of administering Scottish income tax as well as throwing into the mix some interesting anomalies.
“The options set out could – for example – see someone earning between £44,274 and £46,350 per year paying a marginal rate of tax of 53 per cent (income tax and national insurance) compared with a lower marginal rate of 43% for those earning between £46,351 and £100,000.
“Introducing a new ‘intermediate’ rate raises questions on the eligibility of certain Scottish taxpayers currently receiving Marriage Allowance because they pay the basic rate of income tax but who, from next April, will pay the new 21p rate. This could see Scottish taxpayers earning more than £24,000 being unable to claim this allowance.
“And of course, we can’t rule out that an increase in the higher rate of income tax will prompt some who are able to – such as self-employed businesses – to opt out of Scottish income tax in favour of a lower UK wide rate of corporation tax.
“The nature of our tax system already makes it very difficult to educate the public over what they pay and when they pay it without introducing additional complexities.
“Moving forward, this debate needs to be more than just what Scottish income tax we will pay and when, but also how this interacts with the wider UK tax regime.”
Yvette Nunn, Co-chair of ATT’s Technical Steering Group added: “Now that rates of income tax are going to diverge more significantly north and south of the border, it is crucial that HMRC are able to identify who is a Scottish taxpayer. This is something that the National Audit Office raised as a concern in its latest report publishedin November. It is also an area of concern that the ATT has raised in the past for specific groups of taxpayers.
“Scottish taxpayers with savings and dividend income will still be using UK-wide rates for these sources of income. The new rates for non-savings and non-dividend income will introduce further complexity in the computations that HMRC software developers need to programme. In 2016-17 HMRC struggled to get their software specifications correct. This meant a number of self-assessment returns for this year have had to be submitted on paper, rather than electronically as HMRC’s software was not producing the correct tax liability for those cases. We would not want to see a repeat of this problem when calculations are made yet more complex for Scottish taxpayers.
“Scottish taxpayers with multiple employments and/or pensions will also need reassurance that their overall tax figure is correct when these new rates come into force. If a lower rate is applied incorrectly to more than one of their sources there could be some nasty surprises when their tax is reconciled at the end of the year.“
Among the other measures announced in yesterday’s budget were:
- Full relief from LBTT – the Scottish equivalent of stamp duty – on up to £175,000 for first time home buyers
- Funding to reduce the attainment gap in Scottish schools increased from £170m to £179m
- An increase in health funding of more than £400m – double the amount needed for NHS spending to keep pace with inflation
- £243m towards the expansion of free nursery education and childcare
- Local government resource budget will be protected in cash terms with the capital budget increased in real terms “resulting in a total increase in local authority core funding of £94m”
- Private schools will no longer be eligible for charitable relief from business rates, but universities and council arm’s length bodies will be.