Who is better off and who is worse off after today’s income tax announcements?

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Both £33,000 and £26,000 have been quoted as the threshold below which Scottish taxpayers will pay less tax as a result of today’s tax policy announcements. But which figure is correct? 

Undoubtedly on the tax side the big announcements today related to changes to income tax in Scotland.

Derek MacKay announced that his draft budget proposed:

  • Introducing a new ‘starter’ rate of income tax of 19% on incomes between the Personal Allowance (£11,850 in 18/19) and £13,850
  • The Basic Rate will be maintained at 20% on incomes between £13,850 and £24,000
  • A new Intermediate Rate of 21% will be introduced on incomes from £24,000 to £44,273
  • The Higher Rate threshold will be increased to 41%, whilst the Additional Rate will be increased from 45 to 46%.

The Scottish Fiscal Commission estimates that these tax decisions will raise around £164 million of additional revenues for the Scottish budget in 2018/19.

But who will pay more and who will pay less as a result of these tax decisions?

The importance of baselines

In its Budget, the Scottish Government says “When combined with the increase in the Personal Allowance next year, these proposals mean that nobody earning less than £33,000 will pay more income tax in 2018-19 than they do this year.”

The Scottish Fiscal Commission in its Fiscal Forecast report states: “all taxpayers with gross incomes below £26,000, in 2018-19, will see their tax liabilities reduce by a maximum of £20.”

The key difference is the policy baseline that today’s announcements are compared to.

Under the Scottish Government’s proposed income tax policy, everyone earning under £33k will pay less tax in 2018/19 than they did this year (2017/18).

BUT part of this is due to the increase in Personal Allowance, which would have happened anyway, i.e. irrespective of any announcement made by Mr Mackay today. The increase in the Personal Allowance from £11,500 to £11,850 saves a typical taxpayer (i.e.all  taxpayers earning less than £100,000) £70 per year.

Taking the personal allowance rise into account, it is more accurate to say that the policies announced by the Government today mean that everyone earning less than £26k will pay less tax in 2018/19 than they would have done without today’s tax announcements.

Given that the correct baseline to compare to is the counterfactual estimate of what Scottish taxpayers would have paid in 2018/19 in the absence of the Scottish Government’s announcement today, what does today’s announcement mean for taxpayers with different incomes? This is summarised in the table below.

 Impact of today’s income tax policy announcements

IncomeAmount better/ worse off (£)Change in after tax income (%)
£15,000£200.13%
£20,000£200.10%
£25,000£100.04%
£30,000-£40-0.13%
£40,000-£140-0.35%
£50,000-£240-0.48%
£75,000-£490-0.65%
£100,000-£740-0.74%
£150,000-£1,359-0.91%
£200,000-£1,859-0.93%

Going forward

Today was the opportunity for the Scottish Government to unveil their proposals for how the new tax powers of the Scottish Parliament should be used.

But, as with any minority government, the Scottish Government now require to get the consent of at least one other party in order to be able to pass their budget early next year.

This means that there is scope for the proposals announced today to change between now and the budget bill being passed in February.

December 14, 2017

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