CUT TAX RATES IN SCOTLAND OR FACE AN EXODUS

Warning skilled workers could quit if tax gap with rest of UK grows

SCOTLAND is facing the threat of an exodus of skilled workers if the tax gap with the rest of the UK grows, experts have warned.

Workers in the rest of the UK are on course to see reductions in their tax, with both Tory leadership candidates outlining plans to cut bills.

But this could widen the existing tax gap between Scotland and the rest of the UK.

An economic think-tank has said this could lead to more people leaving Scotland to escape more punitive rates unless they see a significant increase in the quality of public services.

Research by the Fraser of Allander Institute shows a 1p cut to the basic rate of income tax – planned for 2024 by the UK Government – would hand a £420million funding boost to the SNP. But SNP ministers have already made an assumption in their spending review that they will not follow the tax cut move.

David Phillips, associate director of the Institute for Fiscal Studies, said: ‘If the UK Government cut income tax, because less

revenue would be raised in England, Wales and Northern Ireland, the block grant adjustment made to Scotland’s funding to account for income tax devolution would be lower.

‘This would automatically provide extra grant funding for the Scottish Government, which would allow it to cut its own taxes if it so wished.’

He said a 4p cut to income tax rates in other parts of the UK would provide enough extra funding to allow the Scottish Government to cut its starter, basic and intermediate rates, which covers all earnings up to £43,662.

But Mr Phillips said the ‘relative tax rate’ between Scotland and the rest of the UK would grow if the Scottish Government opted to spend the extra money in other ways.

He said: ‘If it chose to spend the money on better public services and/or more generous devolved social security benefits, that might make Scotland a more attractive place to live and work, offsetting the effect of the income tax differential.

‘There might be some “sorting effect”, whereby people who particularly valued the public services moved to Scotland while people who particularly valued the tax cuts moved away.’

Everyone earning more than £27,850 in Scotland currently faces higher income tax bills than people living in other parts of the UK.

If the UK Government follows its plan to drop the basic rate in England to 19p but rates and bands remain unchanged in Scotland, everyone earning more than £14,732 would pay more tax in Scotland.

The gap between tax paid in Scotland and the rest of the UK would rise from £396 for those on £30,000, to £1,863 at £50,000, £2,220 at £80,000 and £3,046 at £150,000.

Fiscal policy expert at the think-tank David Eiser said a decision to retain the difference in tax by cutting the starter, basic and inter-mediate rates by 1p in Scotland would have ‘substantial revenue implications’.

In a blog, he said: ‘The Scottish Budget would be around £420million lower in 2024/25 than it would be relative to the “no policy change” scenario. This comparison is important because the Scottish

Government’s spending plans for 2024/25, as set out in its Spending Review in May, are predicated on the assumption the UK Government does reduce the basic rate to 19p, but Scottish tax rates remain unchanged.’

Andrew Bowie, Tory MP for West Aberdeenshire and Kincardine, who is backing Rishi

Sunak’s leadership campaign, said: ‘We’re already seeing a shortage of doctors, nurses and police officers. That is, I think, a result of people looking at the differential tax and thinking that, if you are at a certain grade, then it is better for you and your family to stay south of the Border.’

He added: ‘We need to be in line with the rest of the United Kingdom if we are going to attract those highly skilled individuals – the job creators, the wealth creators, the professionals.’

A Scottish Government spokesman said: ‘Ministers’ decision to create a fairer tax system in Scotland has protected lower earners while raising additional money to invest in vital public services.

‘Speculation about potential tax cuts by UK ministers at some point in the future only distracts attention from the practical steps the UK Government must take now to support people struggling with the cost of living crisis.’

‘We need to be in line with rest of UK’ ‘Revenue implications’