Changes in Derek Mackay’s Scottish Budget will see income tax bills rise for three out of ten taxpayers – although more than half will pay less than if they lived south of the border.
The Holyrood Finance Secretary is proposing a series of changes to the income tax system, which will see the two highest rates increased by 1p.
While the basic rate of income tax will be frozen at 20p, Mr Mackay plans to establish a new intermediate rate of 21p, which would apply to earnings between £24,000 and £44,273.
But he is also bringing in a “starter rate” of 19p, which will be paid on the first £2,000 of taxable earnings.
Those earning less than £26,000 a year will pay less in income tax than they would if they lived elsewhere in the UK, the Scottish Government said.
Its figures showed 55% of Scottish taxpayers will pay less compared to south of the border – with 45% of people paying more.
In addition almost a third (30%) of taxpayers in Scotland will pay more in income tax next year than in 2017-18 – with the changes coming for those on salaries of £33,000 a year and above.
Meanwhile someone in Scotland earning £150,000 will pay £1,774 more than if they lived elsewhere in the UK.
But almost two thirds (64%) of current basic rate taxpayers in Scotland will end up paying less next year than in England.
The Finance Secretary told MSPs at Holyrood: ” The specific tax reforms I have announced today will raise an additional £164 million for investment in our public service and our economy.”
Mr Mackay went on to state that decisions in the Budget had ” enabled me to reverse the real terms cut that the UK Government has imposed on our resource budget next year, whilst ensuring that Scotland is not just the fairest taxed part of the UK but, for the majority of taxpayers, the lowest taxed part of the UK”.
First Minister Nicola Sturgeon said on Twitter: “Progressive changes in tax are necessary to protect public services and invest in economy. However, seven in 10 taxpayers will pay less than they do now – and more than half of taxpayers in Scotland will pay slightly less than they do in rest of UK.”
The income tax changes were announced as the Scottish Fiscal Commission, set up to provide official tax and economic forecasts for Scotland, warned of a “subdued outlook for economic growth”.
The Commission’s report – published at the same time as the Budget – forecast that the economy north of the border will grow at less than 1% per year until 2022.
It expects GDP growth to be 0.7% in both 2017 and 2018, rising to 1.1% in 2022, driven by an outlook of low productivity in Scotland over the next five years.
Commission chair Lady Susan Rice said: “This outlook in turn impacts on tax revenues, particularly our forecasts of income tax.”
The Commission has slighted downgraded the amount it expects the Scottish Government to raise from income tax in 2018-19 from £12.3 billion to £12.1 billion.
That includes changes as a result of the new five band income tax system, which it said would raise an additional £164 million next year, rising to £199 million by 2022-23.
Lady Rice said: ” Since we were established as a statutory body in April, we’ve been working hard to develop our models and approaches, ensuring we’re using the best and most suitable data and models appropriate to Scottish circumstances.
“Our forecasts play an important part in determining the Scottish Budget. The OBR’s forecasts for equivalent UK Government tax receipts are also used to work out the total amount of money the Scottish Government has to spend.”
Economics expert Graeme Roy, the director of the Fraser of Allander Institute think tank, said: ” Whilst much of the political reaction will no doubt focus on Mr Mackay’s tax announcement, arguably the big story of the budget was the forecasts for growth – or lack of it – from the Scottish Fiscal Commission.
“The independent body predict that growth in Scotland will remain below 1% to 2021, well below Scotland’s average growth rate since the early 1960s.”
He added: ” Despite this weak outlook for growth in the economy, the SFC’s forecasts for tax revenue growth are more optimistic enabling Mr Mackay to offset a reduction in the resource block grant from Westminster through a targeted income rise focused on higher earners.”