Impact of 50p additional tax rate ‘remains uncertain’, says Scottish Government report

Money and payslip - Image credit: Nick Ansell/PA

The impact of increasing the additional rate of income tax from 45p to 50p in Scotland “remains uncertain”, according to a report by the Scottish Government’s chief economist, Gary Gillespie.

The report suggests that depending on the taxpayer response to the change, a 5p increase could generate up £53m more in tax or reduce income tax revenue by up to £24m.

According to the study, the biggest risk in the short term would be individuals bringing forward revenue into the previous tax year ahead of the change.

However, it warns that the “associated revenue loss may be larger in the longer term”.

This is because taxpayers could adjust their behaviour over time, with additional rate taxpayers “more mobile” and having “more opportunities for reducing their tax bill”.

This could be, for example, by changing their main address on paper to a second home elsewhere in the UK, or forming a company to benefit from lower corporation tax rates.

However, modelling could not accurately predict the response, as on the one hand, income is harder to move than savings and dividends, but on the other it is easier for taxpayers to move within the UK than from the UK to another country, such as when a UK-wide 50p rate of tax was introduced in 2010.

However, the report notes that “individuals’ choice of where to live is complex, and taxation is only one factor which people take into account.

“For example, the quality of public services, housing costs and related factors are also an important consideration.”

It also suggests that the effects would be proportionately less in the case of a rise of less than 5p.

The report concludes that there is “likely to be a revenue and policy risk associated with increases to the AR that result in a substantial divergence with the equivalent rate in the rest of the UK”.

Additional rate of tax is currently payable on incomes above £150,000, with around 20,000 taxpayers in Scotland falling into that band.

They make up less than one per cent of the population, but contribute around 19 per cent of the income tax revenue, meaning any policy change could affect few people but have a potentially significant effect on revenue.

The report updates previous analysis by the Scottish Government in March 2016 to include recent developments as well as discussion of the Scottish Government’s consultation paper The Role of Income Tax in Scotland’s Budget and input from the Council of Economic Advisers.

Gillespie said: “Earlier this year the First Minister asked the Council of Economic Advisers to advise on the potential impact of increasing the additional rate of income tax in Scotland to 50 per cent.

“Specifically our advice has considered behavioural impact, and options for mitigating any such behaviour.

“The analysis shows that additional rate taxpayers tend to be more mobile and have more opportunities to reduce their tax bill compared to those on lower incomes.

“As such, an increase in the additional rate is likely to generate a larger behavioural response than changes to the basic or higher rates.

“However our analysis also notes that a lower increase in the additional rate could mitigate the behavioural response and provide a greater opportunity to raise revenues.

“The report concludes that there is likely to be a revenue and policy risk associated with increases to the additional rate that result in a substantial divergence from the rest of the UK but that smaller changes could alleviate the risks identified.”

Finance secretary Derek Mackay is predicted to announce changes to income tax when he presents the draft Scottish budget on Thursday.