SCOTLAND’S growing tax gap with the rest of the UK will lead to some higher earners shifting their residency status south of the Border in a bid to save cash, ministers have been warned.
Official forecasters said the decision to freeze income tax rates in the draft Scottish Budget will mean Scots earning £50,000 will be forced to pay around £1,540 more than their English counterparts.
The Scottish Fiscal Commission (SFC) said there is now a “growing gap between the higher rate threshold in Scotland and the rest of the UK”.
It suggested this will start to change behaviour, affecting the number of hours someone works as well as tax residency decisions.
This will hit income tax revenue by £13 million in the next financial year, the SFC estimated. As a result of the Budget changes, 24,000 additional taxpayers will move into the higher rate band.
The watchdog said: “Changes in taxpayer residence behaviour includes both changes in migration and, for those individuals who already split their lives between Scotland and the rest of the UK, decisions about how to report their primary residence to HMRC.
“We expect the latter category to account for most of the behaviour change in response to higher income tax in Scotland by higher and additional rate taxpayers.”
Elsewhere, the SFC said expected income tax receipts will be £661m lower in 2019/20 than it forecast in May.
But it said Scotland’s economic outlook in the next financial year has improved, while the changes announced in Finance Secretary Derek Mackay’s Budget will raise an additional £68 million in income tax – despite the risk of behavioural change.
The SFC forecast economic growth of 1.4% this year – faster than the UK as a whole – and 1.2% in 2019.
This is an increase of 0.7 and 0.4% respectively, when compared with the SFC’s May forecasts.
However it said annual economic growth will settle back to around 1% from 2020 onwards,.
Dame Susan Rice, chair of the SFC, said: “There is little change in the longer term when we expect the economic prospects for Scotland to remain subdued.”
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