Tension over predicted tax hikes builds as budget day finally arrives

Experts are predicting that Scotland’s finance secretary Derek Mackay will this afternoon confirm income tax rises for middle and higher earners when he unveils his draft budget for next year.

Using new powers over income tax rates and bands given to the Scottish government last year, Mr Mackay will say the increase in taxation is needed to raise more money to help protect public services.

Under its new powers, the Scottish Government can vary the rates at which income tax is paid on wages, pensions and self-employed income. It can also vary the point at which tax rates apply while the UK Government controls the personal allowance and the rates applicable to dividends and savings income.

The expected move has caused controversy because at last year’s Holyrood election, the SNP promised to “freeze the basic rate of income tax throughout the current parliamentary session to protect those on low and middle incomes”.

However, while citing what SNP leaders say is the need to mitigate the effects of Tory austerity on Scotland’s budget, Mr Mackay’s draft budget today for 2018/19 is expected to widen the tax gap between Scotland and the rest of the UK by increasing the tax bill for the better off and high earners.

It is understood a fourth income tax band may be created between the current 20p basic and 40p higher rates, and an extra penny added to the current top rate of 45p, with First Minister Nicola Sturgeon previously suggesting it is time for higher earners to pay a “modest” amount more.

She and Mr Mackay set out a series of possible income tax models last month, with many of them adding additional tax bands to those currently in place across the UK.

The various models were estimated to raise up to an additional £290m - less than 1per cent of the Scottish government’s total budget, which was about £33bn last year.

If adopted, the new band increases in income tax will mean many people in Scotland will pay more than those on the similar salaries elsewhere in the UK.

But while John Todd, tax partner at accountants Johnston Carmichael, believes increases in income tax rates in some existing bands are “highly likely”, he predicts Mr Mackay will leave the basic rate left unchanged in Scotland.

Last month, Chancellor Philip Hammond announced an increase in the basic rate income tax (20 per cent) band from £45,000 to £46,350 for the rest of the UK. This represents a 3 per cent increase in line with the Consumer Prices Index (CPI). The current basic rate band in Scotland ends at £43,000.

The draft Budget presented by Derek Mackay last year planned to increase the £43,000 by the CPI rate at that time. But, without a majority, the Green Party support was required to pass the Budget and, after negotiations, the basic rate band was frozen at £43,000. The Scottish Government recently issued a consultation paper which outlines several options for setting income tax rates and bands.

Mr Todd of Johnston Carmichael said: “Last year, the government considered increasing the 45 per cent rate to 50 per cent, but obtained advice that predicted this would result in a reduction in tax revenue due to behavioural effects. One option outlined in the paper is to leave the basic rate at 20 per cent, but to increase the 40 per cent and 45 per cent rates to 41 per cent and 46 per cent.

“My gut feeling is this will be the option put forward this week along with an inflationary increase in the basic rate threshold.”

The predicted tax rises have been attacked by business bodies such as the Scottish Chambers of Commerce and the Federation of Small Businesses, and yesterday Conservative MSP Murdo Fraser blasted the SNP government for appearing to abandon its manifesto pledge to keep income tax frozen.

Mr Fraser said the government should concentrate on economic growth, not “increasing the tax burden on hard-working families”.

Responding, Mr Mackay said the UK Government was “the biggest threat to the economy in Scotland”.

He said: “We want to protect and promote our public services. We also want to protect lower income earners, use the tax system in a progressive fashion, and we also want to protect the economy.”

Mr Fraser later added: “What we have seen here is the SNP voting in parliament against its very own manifesto pledge. They have disowned that pledge, and signalled their intention to punish hard workers. They’ve misled voters, and owe them a huge apology not just for hiking their taxes, but deceiving them too.”

Ahead of his Budget announcement today, Mr Mackay the government’s priorities would be “stopping UK cuts, protecting public services and unlocking Scotland’s economic potential”.

He added: “This will be a budget that is good for taxpayers, good for public services and good for business. It is a budget that will deliver for Scotland.”