Higher rate taxpayers see hike in Scottish tax bills
23 Jul 2019
The number of higher and additional rate taxpayers in Scotland is growing at a faster rate than the rest of the UK as the tax burden has shifted to higher earners
23 Jul 2019
The latest HMRC figures show that income tax revenues in Scotland are estimated to increase by 7% in 2018-19 to £11.7bn, according to provisional estimates, up from £10.9bn in 2017-18, with growth driven primarily by an increase in contributions from higher and additional rate taxpayers. However, this is short of original expectations. However, the figure is lower than originally forecast, with central government highlighting a £941m shortfall.
Growth in tax paid by additional rate taxpayers was faster in Scotland, up 8.5% compared to 8% in the rest of the UK, although Scotland only accounts for 6.9% of total income tax receipts across the entire UK.
The decision by the Scottish government to freeze the higher rate tax threshold was expected to yield an additional £78m in taxes through an increase in contributions from higher and additional rate taxpayers - those earning above £43,000 in Scotland for the 2018-19 tax year.
The tax threshold for 2019-20 has increased to £43,430, and higher rate taxpayers have to pay a 41% tax rate, compared with 40% in the rest of the UK, while those earning over £150,000 face a 46% tax rate. This rise is expected to collect an additional £72m in taxes.
By comparison, the tax burden in the rest of the UK is shifting away from middle earners as the higher rate threshold is being increased to £50,000 by 2021, taking more people out of higher rate tax. Higher and additional tax rates remain unchanged at 40% and 45% respectively.
The introduction of the changes to the higher rate threshold, which has been in force since 2017, is part of a more progressive approach to devolved taxes in Scotland. This was accompanied by changes to the income tax banding system, with a new five band system operating since 2018-19, which was estimated to increase tax take by £220m, according to the Scottish Fiscal report.
There is now a starter tax rate of 19% for those earning below £14,549. However, this has come at the expense of earners between £24,944 to £43,430, who pay a 21% tax rate.
PAYE receipts grew faster in Scotland in 2018-19 at 5.9% compared to the rest of the UK at 5.1%. Under the devolved tax regime, Scotland does not have powers to set national insurance rates.
Finance Secretary Derek Mackay said: ‘These statistics show that the Scottish Government’s choices on taxation are helping to create a more progressive tax system at the same time as our economy is growing with low unemployment.
‘Between 2016-17 and 2017-18, Scottish income tax revenue increased by £197m, a growth of 1.8%, while the number of Scottish Higher and Additional Rate taxpayers combined, and the revenue paid by them, grew more quickly in Scotland than in the rest of the UK.
‘These figures demonstrate that concerns taxpayers would relocate as a result of our tax policy choices were unfounded.
‘While we support changes to the personal allowance, it has reduced the number of basic rate taxpayers in Scotland by a greater degree than across the rest of the UK. We have yet to receive the additional funding that should come as a result of that UK policy decision.
‘I remain of the view that it would be beneficial for the people of Scotland if we had full control all aspects of the income tax system.
‘We now know the reconciliation amount that will apply to the coming budget, but the 2018-19 reconciliation will only be confirmed with the outturn figures published next year. However, the PAYE receipts data shows stronger growth for Scotland than the rest of the UK for 2018-19, which could have a positive impact on the size of next year’s reconciliation.
‘The volatility the current system places on Scotland’s spending means the fiscal framework review must consider the current limits on the use of the reserve and borrowing powers which are clearly not fit for purpose.’
The Scottish government has not yet announced whether it intends to change tax rates for the 2020-21 tax year.
Sara White | 22-07-2019