Scotland’s new tax system could have “significant implications” in long term, says IFS

Scotland’s new income tax system, which comes into force today, could have significant implications on taxpayer behaviour in the long term, according to economic think tank the Institute for Fiscal Studies (IFS).

The system introduces new rates in an attempt to make income tax more progressive.

A starter rate of 19 per cent for low earners has been introduced, while an intermediate rate of 21 per cent will apply to those earning over £24,000. The higher and top rates have been increased slightly.

In a new report the IFS describe the changes as “small tweaks” but suggest the divergence with the rest of the UK could lead to more radical proposals in the future.

The Office of Budget Responsibility (OBR) has estimated no high earners will leave Scotland as a result of the changes but expects some with multiple properties to change their tax residence to one outside of Scotland.

“These behavioural responses are likely to be relatively moderate while the UK and Scottish income tax systems differ only slightly,” the report said.

“But the ease with which individuals may be able to avoid higher taxes north of the border suggests that policymakers may wish to pause and consider the evidence of what happens in response to this small change before implementing any more radical departures.”

IFS research economist and co-author Thomas Pope said: “Today, the devolved Scottish income tax system has diverged further from its counterpart in the rest of the UK. Three quarters of Scots will either continue not to pay any income tax or will receive a modest tax break of up to £20 a year. The losers are higher-earning Scots.

“An individual earning enough to be in the top one per cent of UK taxpayers would pay over £2,000 per year more in tax if they live in Scotland. The measures would raise less if these high earners switch their residence to elsewhere in the UK or set up a company in response. While these responses are likely to be moderate while the UK and Scottish systems remain quite similar, further reforms in this direction would be likely to see more individuals changing their behaviour – and reducing their Scottish tax bills – in response.”

Finance Secretary Derek Mackay said: “The new income tax rates and bands will make the system more progressive and deliver additional revenues to invest in public services and the economy.

“This progressive approach to reforming income tax will not only protect the lowest earning taxpayers, but ensure 70 per cent of Scottish taxpayers pay less tax this year than last year for a given income, while the majority of Scottish taxpayers will pay less than if they lived elsewhere in the UK.”

Scottish Conservatives have slammed the system for delivering a tax rise for Scots.

<blockquote class="twitter-tweet" data-partner="tweetdeck"><p lang="en" dir="ltr">Earning over £26,000, like a nurse, police officer or teacher? Well, from today, the SNP are taking more money out of your pay packet. <a href="https://t.co/ZizNI98aRP">pic.twitter.com/ZizNI98aRP</a></p>&mdash; Ruth Davidson (@RuthDavidsonMSP) <a href="https://twitter.com/RuthDavidsonMSP/status/982164576388071424?ref_src=twsrc%5Etfw">April 6, 2018</a></blockquote>

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