Budget: Chancellor throws down the gauntlet to Mackay on income tax

In a budget that Mr Hammond said was aimed at helping “the strivers, the grafters and the carers” and that would pave the way for a “brighter future”, he announced that the higher rate tax threshold applicable under his jurisdiction will increase from £46,350 to £50,000 from next April, a year earlier than expected.

The decision now extends the income tax gap with Scotland, where the threshold is set by the SNP government and is currently only £43,430. Income above this level up to £150,000 is taxed at 41p in the pound, 1p more than in England.

Alan Turner, partner and head of tax for KPMG in Scotland, said the Chancellor has posed a challenge to Scottish Finance Secretary Derek Mackay as he prepares for the Scottish Budget on 12 December. “If he does not follow the Chancellor’s changes, the divergence between income tax paid by higher earning taxpayers in Scotland and the rest of the UK would become more significant.”

Also reacting to the Chancellor’s announcement, Laura Mair, EY’s head of tax in Scotland, said: “By bringing forward the increase to the threshold for higher rate taxpayers in England, Wales and Northern Ireland the Chancellor has widened the gap between the amount of tax paid by some higher earners in Scotland versus their equivalents in the rest of the UK (rUK). It looks likely those who earn around £50,000 in Scotland might be out of pocket by the equivalent of the annual energy bill of the average Scottish household following these changes.

“As such, this throws down the gauntlet to the Scottish Finance Minister for his Budget announcement in December. Will he choose to maintain the existing differential by making similar changes or see the gap between some Scottish taxpayers and rUK increase further.”

Moira Kelly, chair of the Chartered Institute of Taxation’s Scottish Technical Committee, said: “Today’s announcements highlight the practical difficulties of having control over some – but not all – aspects of the income tax regime.

“Because the Scottish Government has no control over the level at which the personal allowance is set, it means that thousands of people who paid Scottish income tax this year will be taken out of the income tax system altogether, resulting in a loss of revenues that would otherwise have gone directly to Holyrood.

“With a median income of £24,000 per year in Scotland and only 2.5 million taxpayers, losing tax contributions from several thousand individuals can have a significant impact on the Scottish budget.

“The Scottish Government does, however, have control over rates and bands, including the power to set a higher rate threshold for Scottish taxpayers.

“However, it is unlikely that they will follow the UK Government’s lead in increasing the higher rate threshold to £50,000 from next April, highlighting a growing gulf between Scottish and English taxpayers.

“For those who are able to – such as self-employed business owners – this is likely to increase attractiveness of reorganising their tax arrangements to opt out of Scottish income tax and into UK-wide corporation tax in order to reduce their liabilities”.