MSPs last week voted to back the Scottish Government’s income tax proposals for 2019/20.
The vote in favour of the measures was 61 votes to 52, with SNP MSPs the only group to support the proposals. The Scottish Conservatives, Scottish Labour Party and Scottish Liberal Democrats all voted against the plans, with the six Green MSPs abstaining.
The Greens’ abstention meant that the government could be assured that its vote would pass, which may help to explain why the first minister, Nicola Sturgeon, was able to miss the vote.
The vote enabled the Scottish Parliament to move ahead with the final vote on the Budget (Scotland) (No.3) Bill on Thursday of last week, confirming the government's spending proposals for the year ahead.
The income tax proposals, as set out in the December 2018 Budget statement, freeze Scotland’s five rates of devolved income tax at 19 per cent (starter rate), 20 per cent (basic rate), 21 per cent (intermediate rate), 41 per cent (higher rate) and 46 per cent (top rate).
The first three bands of income tax will rise in line with inflation from April and the higher rate band will be frozen at £43,430.
The UK Government’s decision to increase the tax-free personal allowance to £12,500 and the UK higher rate threshold to £50,000 will also have an impact on Scotland. In the case of the former, it has the effect of reducing the number of taxpayers in Scotland by lifting them out of income tax altogether. In the case of the UK higher rate threshold, this has the effect of widening the income tax gap between Scotland and the rest of the UK by bringing those earning between £43,430 and £50,000 into a higher rate of tax than the rest of the UK.
It also has the effect of exposing taxpayers to a marginal rate of 53 per cent (41 per cent income tax and 12 per cent National Insurance Contributions (NICs)).
It is worth noting that although Wales now has the power to set a Welsh rate of income tax, it has chosen to replicate the UK Government’s income tax rates and bands in 2019/20.
Kate Forbes MSP, the public finance minister, spoke on behalf of the Scottish Government, stating that the income tax measures would meet the government’s four tests of protecting the lowest paid, improving progressivity, generating additional revenue and supporting the Scottish economy.
On the issue of the misalignment in income tax and NICs for taxpayers earning over £43,000 and less than £50,000. Liberal Democrat MSP Mike Rumbles questioned whether it was “progressive for the state to take more than half (of this income)”. Ms Forbes alluded to the “limitations” placed on the Scottish Government by the partial devolution of income tax powers and in particular, the retention by the UK of control over the administration of income tax and powers over NICs and income tax on dividends and savings.
Emma Harper, an SNP MSP and member of the Finance and Constitution Committee, also spoke about the balance of tax powers between Westminster and Holyrood and in that context, welcomed HMRC’s commitment “to ensuring that its database of Scottish taxpayers is kept up to date and regularly checked”.
Ms Forbes – an accountant by profession – also confirmed that the Scottish Government’s Council of Economic Advisers had been instructed to expand its analysis of the impact of potential behavioural effects of tax policy divergence and the possible impact of future revenues.
Despite the potential risks of divergence, Ms Forbes stressed that the government’s tax plans would “even under the most pessimistic assumptions…still raise additional revenues”.
Responding on behalf of the Scottish Conservatives, Murdo Fraser said his party did “not believe that it is fair to burden hard-working Scots with yet more taxes and to widen the income tax gap between Scotland and the rest of the UK”. He also accused the SNP of breaking a 2016 manifesto pledge not to increase taxes on basic rate taxpayers and cited the concerns of the Chartered Institute of Taxation that income tax divergence may see some taxpayers seek to “legitimately limit their liabilities” (see above).
Mr Fraser’s references to the CIOT’s concerns were also highlighted by his colleague Bill Bowman MSP – the Conservatives' taxation spokesperson – later in the debate and again by Dean Lockhart MSP in Thursday's Budget debate.
SNP MSP John Mason also sounded a note of caution in relation to the potential behavioural impacts on Scottish revenues. Mr Mason – the third accountant after Ms Forbes and Mr Bowman to speak in the debate – said “Residence can be changed fairly readily, and the last thing that we want is to lose taxpayers and, subsequently, all their tax—from Scotland to the rest of the UK or anywhere else”.
Mason also lamented the Scottish Government's limited powers over taxation and called for income tax and national insurance to be combined so that “taxpayers throughout the UK would see much more clearly what an unfair and regressive system the UK currently has”.
Scottish Labour’s finance spokesperson James Kelly reiterated his party’s opposition to the income tax proposals, instead calling for a 50 pence top rate of tax and a splitting of the higher rate band to generate “significant amounts of money” for public spending.
For the Scottish Greens, Patrick Harvie welcomed the progress that had been made in differentiating the Scottish income tax system from the rest of the UK. He was critical of the UK decision to increase the tax-free personal allowance to £12,500, arguing that it was not a progressive measure and that it benefited “high-income households”.
Willie Rennie suggested that it was the Liberal Democrats who were the first to advocate the use of Scotland’s income tax powers in a progressive manner. He argued that “modest, progressive tax changes that deliver a benefit to public services” were preferable to “ramping up tax at every budget and at every opportunity” (a reference to the Scottish Government’s agreement with the Greens on proposals for further taxes including on car parking, tourists and council tax).
Labour’s Iain Gray, a member of the Smith Commission that recommended the devolution of tax powers following the 2014 independence referendum, said that the parliament’s tax powers were more powerful than they had ever been. But he said that the measures proposed by the government represented an “abdication of responsibility and lack of ambition for our nation” in that they did not go far enough.
The debate brought to a conclusion consideration of the income tax measures first announced in the December Budget. The measures, as agreed by MSPs, will take effect from the start of the new tax year on 6 April.