Ahead of this afternoon’s vote in the Scottish Parliament to set rates and bands of Scottish income tax for the 2019/20 tax year, the Chartered Institute of Taxation (CIOT) is pointing out that income tax decisions taken at Westminster are continuing to have a greater impact on Scottish taxpayers than those taken at Holyrood.
The Institute also warned of the risks that changes to the UK-wide tax free personal allowance posed to the Scottish tax base, despite the benefits that some individual taxpayers will see.
The Institute said that the maximum impact on taxpayers from the Scottish Government’s decision to increase the starter and basic rate thresholds would be £9.93 per year. This compares to the £130 resulting from the UK Government’s policy of increasing the tax-free personal allowance to £12,5001.
Alexander Garden, the new chair of the Chartered Institute of Taxation’s Scottish Technical Committee3, said:
“Some Scottish taxpayers may find that they pay less income tax in the coming year. This can be attributed in part to the Scottish Government’s policy to increase the starter and basic rate bands of income tax, which protect lower paid employees by reducing their tax burden relative to the rest of the UK.
“But the UK Government’s decision to increase the tax free personal allowance – an area that Holyrood has no control over – has a far greater impact.
“This also has the effect of reducing the total number of Scottish taxpayers by taking them out of income tax altogether. While this may be perceived as good for those individuals concerned, it adds further risk and volatility to the Scottish tax regime, by reducing Scotland’s ability to control how much tax revenue it directly raises and subsequently forecasting the amounts of revenue that are raised4.”
Mr Garden also commented on the potential for taxpayers to alter their behaviour as a result of income tax changes:
“As the tax bills for those paying the higher and top rates of tax increase relative to the rest of the UK, there are concerns that some of those taxpayers (being less than 15 per cent of all Scottish taxpayers, but contributing almost 60 percent of all devolved income tax revenue) will seek to take steps to legitimately limit their tax liabilities.
“These taxpayers may choose to limit the number of hours that they work to avoid being pushed into higher rates of tax. They may also choose to increase the amount of pension contributions that they make, effectively increasing the thresholds above which they pay higher rates of tax.
“For the self-employed, the opportunity to pay lower rates of corporation tax by incorporating their businesses5, as opposed to paying income tax, may also become a more attractive option. Higher earners, or those with greater mobility, may even choose to relocate away from Scotland.”
On raising public awareness of Scottish tax decisions, Mr Garden added:
“Tax devolution inevitably increases the complexity of the system. With four-fifths of Scots saying that they need better information over how taxes are decided in Scotland6, the new tax year provides an opportunity to start a broader public discussion on the roles and responsibilities of each government when it comes to setting Scottish tax policy.”
Notes for editors:
1. According to Scottish Government figures, increasing the starter and basic rate thresholds will see Scottish taxpayers benefit by between 49 pence and £9.93 depending on their level of income. The personal allowance is withdrawn at a rate of £1 for every £2 of income above £100,000, meaning that it is completely withdrawn for those with income above £125,000.
2. Wales will have the power to set a Welsh Rate of Income Tax from April 2019 but it has chosen to retain rates and bands at the same level to England and Northern Ireland.
3. Alexander Garden, an Edinburgh-based partner and Head of Tax and Succession at the law firm Turcan Connell, has taken over from Moira Kelly, who stepped down after five years in the role on her retirement from practice with Aberdeen-headquartered Anderson Anderson Brown. He is also a Fellow of the Chartered Institute of Taxation.
A picture of Alexander can be downloaded by clicking on this link.
4. Of 4.5 million adults in Scotland, 2 million (55 per cent) earn enough to pay income tax. The number of taxpayers is most heavily concentrated in the basic (1 million taxpayers) and intermediate (864,000) rate bands, with 351,000 and 16,000 higher and top rate taxpayers respectively.
5. The option to incorporate exists across the UK and is limited to those who are self-employed. In addition, UK policy on off-payroll working in the public and private sectors – known as IR35 – is further reducing this scope.
6. A poll commissioned poll by CIOT from Mark Diffley Consulting and Research and undertaken in September 2018, found that 84 per cent of Scots thought they needed better information about how taxes are decided in Scotland (click here for further details).
7. The Chartered Institute of Taxation
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Chris Young, Scotland External Relations Officer, 07900 241 584; firstname.lastname@example.org