MacKay hints at tax rise for middle earners as think-tank calls for freeze of higher rate tax threshold to lift 40,000 children out of poverty by 2021/22

His comments come as new research published today has described how 40,000 children could be lifted out of relative child poverty in 2021/2022, if the Scottish Government chooses to freeze the threshold at which people begin to pay the higher rate of income tax for the next three years.

The analysis, conducted by think-tank IPPR Scotland ahead of the draft budget on 12th December, considers this option as one available to the Scottish Government to raise income tax revenue.

The report comes as finance secretary Derek Mackay said he “sensed” there is further scope to increase rates for middle earners north of the border.

Currently, tax bands are expected to increase by inflation in Scotland. However, if this is confirmed in next week’s Scottish draft budget, this would provide the biggest cash-terms tax cuts to the highest earners in Scotland.

Those earning over £45k per year would receive a tax cut of over £400 whereas lower earners would receive a maximum cut of just under £140 (those earning under £11,850 would receive nothing).

The projections would also mean the tax gap between Scotland and England would widen after Chancellor Philip Hammond unveiled plans in his recent UK Budget to raise the higher 45p threshold south of the Border to salaries of £50,000 and above. In Scotland this rate, set at 46p, applies at salaries of £43,430 and above.

Speaking to the Financial Times ahead of his budget next week, Mr Mackay said he wants Scotland to have a “competitive tax regime”. “I will always follow the evidence to understand the tolerable levels of divergence,” he told the paper. “However, I do not think that now is the time to pass on tax cuts to the richest.”

The minister said he was committed to progressive taxation, but said he would not raise taxes if this meant lower revenues. Asked whether he thought Scotland was still some way from this, he responded: “That is my sense.”

The IPPR Scotland said its latest findings point to an alternative of freezing the higher rate tax threshold that it said would reduce the cash-terms tax cut for the highest earners next year, would still provide all income tax payers with a cash-terms tax cut compared to this year, while also raising tax revenue to be spent on Scottish Government priorities like ending spending cuts and reducing child poverty.

IPPR Scotland’s analysis found that:

• Freezing the higher rate tax threshold in cash-terms for the next three years in Scotland could raise up to £210m per year by 2021/22.
• This could generate enough to provide an additional 1.6% of spending for non-protected departmental budgets in Scotland (those outside of Health, Police and social security).
• If invested into additional social security payments, it could reduce relative child poverty in Scotland by up to 40,000 children. This could be achieved by effectively ending the two-child limit, the benefit cap and topping up means-tested child payments by £20 per month in Scotland or taking equivalent action through stand-alone Scotland social security payments.
• Freezing the higher rate tax threshold would ensure all income tax payers in Scotland would receive a tax cut in cash terms of up to £139.50 in 2019/20, and the bottom 56 per cent of tax payers in Scotland would pay less tax than in the rest of the UK. By 2021/22 this policy would mean the top 20% of income tax payers in Scotland would be included in the higher rate.

Ahead of what is expected to be a tough Scottish budget, IPPR Scotland is calling on the Scottish government to consider freezing the tax band for higher earners over the coming years, to work towards ending public spending cuts and to meeting Scotland’s ambition to dramatically reduce child poverty.

Rachel Statham, IPPR Scotland economic analyst, said: “The Scottish government should consider action on the higher rate tax threshold at next week’s budget. Our analysis shows that if tax bands go up with inflation as usual, higher earners in Scotland – those earning over £43,430 a year - could receive a tax cut over three times larger than someone earning minimum wage. At a time when public finances are under considerable strain, Scotland can’t afford this.

“By freezing the higher rate tax threshold, the point at which earners begin to pay the 41p tax rate, we could raise additional tax revenue. This could be spent on the Scottish government’s clear priorities, like ending public spending cuts or investing to lift tens of thousands of children out of poverty. What’s more, this measure could still ensure that all tax payers in Scotland receive a tax cut in cash-terms compared to last year, with higher earners benefiting no more than lower earners.

“Both the Scottish government and the Scottish parliament should consider what can be done to raise tax revenue in Scotland in this year’s Scottish budget. Every public policy decision in Scotland needs to be considered in terms of how it can help counter the impact of public spending cuts, deliver more inclusive growth and make progress on other important priorities such as reducing child poverty and inequality.”