Since the historic introduction of Scottish rates of income tax in April 2017, taxpayers north of the border have been subject to different taxation levels on non-savings and non-dividend income than in the rest of the UK.
Holyrood effectively proposed a significantly different income tax policy than the one set by Westminster, and the result saw higher earners pay more than those in England.
HM Revenue and Customs (HMRC) recently issued a report outlining statistics associated with income tax receipts.
Perhaps unsurprisingly, these confirmed that Scottish income tax revenue grew by 1.8% in the 2017-18 tax year.
The report also confirmed this growth was driven primarily by an increase in contributions from higher and additional rate taxpayers – those earning above £43,000 in Scotland that year – as the number of basic rate taxpayers fell, partly due to many lower-earning taxpayers being taken out of the tax system altogether.
This UK tax divide increased when the ex-chancellor, Phillip Hammond, in his last Budget, adjusted the band for higher rate taxpayers south of the border.
This meant that, from April 2019, other UK earners benefited from an uplift in the basic rate tax band.
Scottish Finance Secretary Derek Mackay has confirmed there will be no such adjustment to Scottish tax bands.
HMRC and the Scottish Fiscal Commission have forecast that income tax receipts will grow faster in Scotland than the rest of the UK – a direct result of the differences in tax policy.
There are now five income tax rates in Scotland, after deduction of the tax-free personal allowance of £12,500, ranging from 19% to 46%.
The top rate payable in the rest of the UK is 45%.
Tax bandings in Scotland are also now very different, but the biggest differential is where higher rate tax – currently 41% – becomes payable for those earning more than £43,430.
Elsewhere in the UK, higher rate tax of 40% is paid by those earning in excess of £50,000 – a difference of more than £6,500 of income.
Applying these rates to someone resident in Scotland and earning a £100,000 salary would result in an increased income tax liability of £2,050, compared to those living elsewhere in the UK.
It is also worth pointing out that National Insurance (NI) thresholds remain the same throughout the UK.
This means that for Scotland there is a marginal income tax and NI rate of 53% on income between £43,430 and £50,000, compared with a far lower 32% south of the border.
So what does all of this mean?
HMRC has stressed these statistics are “experimental”, meaning the data is still in the development stage due to the newness of the devolved tax regime.
But it is still difficult to fully embrace positive messages from Mr Mackay about Scottish taxation when, overall, it appears that the economy north of the border is growing slower than in the rest of the UK.
This is a point that has been acknowledged by the Scottish Fiscal Commission in its forecast of a “series of large negative reconciliations for income tax over the next few years”.
Boris Johnson’s promise to raise the basic rate tax band threshold for south of the border to £80,000, rather than the current £50,000, was made before he became prime minister.
If he follows through with this promise, some Scottish taxpayers would end up paying £6,300 more income tax than people elsewhere in the UK.
You have to wonder if the Scottish Government could then be faced with the prospect of future budget deficits as high earners with relatively lower pay packets seriously contemplate relocating south.
Lisa Tait is a private client tax senior manager at Anderson Anderson & Brown LLP
