Budget bunkum – a comedy farce in two parts
As soon as I say this relates to the Scottish Parliament and the Scottish Budget, many of you may stop reading and move on to attend other matters. However, if you have any Scottish clients or are just looking for some light relief and a laugh at the expense of those now blessed to have an S prefix to their tax code, please read on.
You may have seen in the headlines that 368,000 Scots will pay £400 more in income tax than the rest of the UK due to the changes being made in the Scottish Budget. This, however, is only part of the story and if ever there was a tale that demonstrates that a little power is dangerous and acting on what appears to be impulse and not thinking matters through can lead to unfair outcomes, then this is it.
The Scottish Parliament now has the power to extend tax rates and bands. So instead of increasing the higher rate threshold to £45,000 for 2017/18 in line with the rest of the UK, the SNP Government opted to increase the threshold in line with CPI to £43,430. When challenged by the Green Party numerous times on what basis the decision had been made, Derek Mackay, the Finance Secretary, could only respond by repeating “it felt about right”. This very much gave the impression that no thorough thought had been given to the actual outcomes and the policy was made on a whim. One would have to hope that this was not the case, but I fear looking at the results that’s sadly not the case.
As the SNP do not have a majority in the Scottish Parliament they had to do a deal with the Green Party to ensure the budget was not voted down. The agreement reached was to actually freeze the higher rate threshold at £43,000. So other than the headline tax increase what are the untold consequences of their actions?
First of all, the Scottish Government has no control over the setting of the personal allowance. So as it is to be increased by £500, and with no change in the higher rate threshold, the actual basic rate tax band will reduce by the same amount. This will inevitably, come next round of pay rises, drag the likes of healthcare managers, police sergeants and head teachers into the higher rate tax band.
Hardly an attack on the most wealthy!
More importantly, the Scottish Parliament has no control over National Insurance contributions (NICs), so the upper earnings limit will increase to £45,000. This will leave Scottish employees paying a combined income tax (40%) and NICs (12%) liability of 52% on their earnings from £43,000 to £45,000, while the rest of the UK pays 32%.
If you are not chuckling into your coffee cups by this stage, hang on, there’s more.
Now for part two.
The power negotiated by the Scottish Parliament on setting tax rates and bands only applies to earned income. For dividends and savings income or for CGT the UK rates and bands apply. So for many individuals they will be required to do two separate tax calculations.
If the Chancellor, Philip Hammond, keeps to his pledge to increase the higher rate tax threshold to £50,000 by the end of this parliament and the SNP have stated they will only increase the higher rate threshold by a maximum of CPI many more individual will be impacted over time.
This is all bunkum.
Perhaps the SNP should consider the wise words of American Journalist Adam Davidson when he said “We can fight over what the taxation levels should be, but the tax system should be very, very simple and not distortionary”.
This blog first appeared on Professional Adviser