SCOTLAND’S leading economic thinktank has issued a stinging critique of Nicola Sturgeon’s plan for a tax-free £500 coronavirus bonus for NHS and care staff. 

The Fraser of Allander Institute said the First Minister’s plea to Boris Johnson not to tax the money was muddled, would reward the rich more than the poor, and was overtly political.

It said that if the Scottish Government was serious, it should pay staff “a higher gross bonus” to offset income tax, which in any case would come back to Holyrood.

There was a “healthy dose of politics” in the tax plea from the First Minister, it said.

“Exempting any bonuses from tax is not widely regarded as a good use of tax policy.

“There’s a reason bonuses are taxed; if they weren’t, everyone would want paid in bonuses rather than regular pay. 

“Making an exception to the rule once opens the possibility of endless future lobbying for tax-exempt bonuses – which is not something any government should be keen to encourage.”

The Institute also said making bonuses tax free would not be progressive, as the better off would avoid more tax. 

“Exempting the bonus from tax would gift higher rate taxpayers a significantly larger tax break than basic rate taxpayers.

"It is really not clear what the rationale for this would be.”

The Institute said the UK Government’s “inevitable rejection” of the plea would “serve up exactly what the Scottish Government had really wanted: another example of the devolved fiscal framework apparently not working.”

Separately, the Chartered Institute of Taxation warned that the poorest would also lose universal credit as a result of getting the bonus, cutting its value after tax and all other deductions to as low as £124.

he Scottish Tories demanded the Scottish Government top-up the money as the Institute suggested and “stop playing politics with the pandemic”.

Labour said the SNP should stop treating frontline workers like “political footballs”.

The criticism coincided with the public health union Unison calling off a strike ballot over pay.

The row blew up in the wake of Ms Sturgeon announcing the plan in her keynote speech to the SNP annual conference on Monday.

She said that as a “one-off thank you payment”, all NHS and adult social care workers would get a £500 bonus, and then pointedly asked the Prime Minister not to tax it.

The £180m plan will benefit over 300,000 staff, including nurses, porters, doctors, primary care staff, homecare workers, care home staff, hospice staff and residential child care staff.

The Treasury swiftly shut down the idea of making the money tax-free, pointing out Holyrood was getting an extra £8.2bn this year as a result of Covid, the income tax would flow back to Scotland, and the Scottish Government could bulk-up the bonuses instead. 

In a new blog post, the Fraser of Allander Institute’s director Graeme Roy and Scottish budget expert David Eiser agreed with many of the Treasury points.

They said that under Scotland’s Fiscal Framework, the additional income tax paid by NHS and care workers on the £500 bonuses would flow back into the Scottish budget in 2023/24.

A basic rate taxpayer would take home around £340 of their bonus after tax and National Insurance Contributions, with £100 of income tax going to Holyrood and in 2023/24 and £60 of NICs going to the Treasury.

“If the bonus was exempt from income tax, a basic rate payer would take home £440; the upfront cost of the policy to the Scottish Government in 2020/21 would be unchanged (£180 million), but the Scottish Government would forego the increase in future tax revenues.”

They said that, besides tax-free bonuses being a bad idea because everyone would want one, they also appeared at odds with the SNP’s plan for a progressive tax system, as higher rate taxpayers would benefit more.

“If NHS workers received an extra £500 in normal pay, higher rate taxpayers would pay more of that in tax than basic rate taxpayers – that’s the basis of fairness on which the system is based. 

“Exempting the bonus from tax would gift higher rate taxpayers a significantly larger tax break than basic rate taxpayers. It is really not clear what the rationale for this would be.

“It is perfectly legitimate – and indeed desirable – to want to recognise and reward NHS/care workers for their efforts in recent months. 

“But if policymakers want those employees to benefit by £500 after tax, the solution is to pay a higher gross bonus. 

“There is little reason for these rewards to be exempt from the existing social contract, or for them to require administrative and legislative hurdles to implement. 

“Of course, the Scottish Government knows this, and there is a healthy dose of politics in its call on the UK Government to exempt Scottish bonus payments from Scottish income tax.

“The inevitable rejection of the call by the UK Government served up exactly what the Scottish Government had really wanted: another example of the devolved fiscal framework apparently not working.

“As an insight into next year’s election campaign, this debate gives a taste of things to come.”

The Chartered Institute of Taxation warned there was a "benefits trap" associated with an earnings bonus.

It said for every extra £1 that a person receiving Universal Credit earned over and above their allowance, their benefit entitlement was usually reduced by 63p.

That meant someone earning the median Scottish salary of £25,200 who also received Universal Credit could see the value of their bonus reduced from £500 to £123.95 once taxes and benefits were taken into account.

Moira Kelly, chair of the CIOT's Low Incomes Tax Reform Group, said: "We welcome that the Scottish Government has chosen to recognise the hard work of NHS and care staff during the pandemic, but it is important to point out that if the bonus is taxed, then those on some of the lowest incomes stand to benefit the least.

“For those receiving benefits like Tax Credits and Universal Credit, this would mean that any extra cash they receive may have a knock-on effect on the amount of benefit they are entitled to.

“Every taxpayer’s situation will be different, but the overall picture is that, unless the payment is made tax-free, recipients will end up with less than the headline amount, with some of those on the lowest incomes losing the most.”

Scottish Tory leader Douglas Ross said: “The SNP have all the funding and powers they need to top up this payment today.

"Any extra income tax would go to the Scottish, not the UK Government, so if they increase it, no-one misses out.

“Why is it that the SNP feel the need to take a £500 NHS ‘thank you’ payment and stoke up division with such a clearly political move, all to provoke a fight with the UK Government?

“The SNP are pushing for indyref2 in the middle of a pandemic and creating a political bunfight out of thin air.

"As the Fraser of Allander Institute have now made clear, this is all a political game from the SNP. They’ve dialled nationalist grievances up to 11.

“So my message to Nicola Sturgeon is, put your political guns away, apologise for trying to politicise the efforts of health and social care workers, and top-up this payment immediately.”

Labour MSP Jackie Baillie added: “Frontline health and care workers are not political footballs for the SNP and Tories to score cheap points with.

“The payment announced is welcome, but it is clear that the SNP could not resist another constitutional row rather than simply helping working people.

"The Scottish Government can gross up the payment if it wishes to: it should just get on with it.”

Scottish Liberal Democrat leader Willie Rennie added: "SNP ministers should show more respect to NHS and care workers.

"They should get them the money they believe should be paid and not use them as a battering ram on the constitution.

"The Fraser of Allander Institute estimated last week that the SNP has a billion pounds unallocated. It is important for Scottish ministers to set out quickly which other sectors they will support using that money."

The Scottish scheme echoes that for social care workers in Wales, who were told in May that they would get a £500 coronavirus bonus.

Welsh ministers argued the Treasury should not tax it, but to no avail.

The bonus issue was raised by SNP MPs at Treasury Questions at Westminster today.

Glasgow Central’s Alison Thewliss asked if the Chancellor would “do the right thing and ensure that this festive gift of good will is not clawed back” by HM Revenue and Customs.

Chief Secretary to the Treasury Stephen Barclay reminded her the income tax on the bonuses would be paid to Scotland, not Westminster. 

He said: “The Scottish Government have the power and the funding to gross up the payment if they wish. The UK Government have provided over £8.2 billion extra funding for the Scottish Government this year to support people, businesses and public services.”

Pressed by Edinburgh East MP Tommy Sheppard on whether the Chancellor would tax the bonus, Mr Barclay said the UK Government would act as it did with the Welsh bonuses. 

He said: “While decisions on whether to exempt these payments are reserved, the Scottish Government will keep all the income tax receipts from these payments, so if they wish NHS and care workers to receive £500 net of tax, which is what they say is their wish, they can simply increase the value of the payments going to them. 

“That is the point of substance. That is the point they do not want to engage on.”

Responding for the SNP,  MSP Tom Arthur MSP said: “It is the SNP who are giving health and care workers in Scotland a thank you bonus so far unmatched anywhere else in the UK – and it is Boris Johnson who is outrageously threatening to snatch as much of it as he can away from them in tax.

“Instead of defending the indefensible, the Scottish Tories should be trying to use whatever dwindling influence they think they have on the Prime Minister to tell him to do the right thing.

“While income tax is devolved, the tax on this bonus wouldn’t be paid back to Scotland until 2023/24 – and National Insurance contributions would just be swallowed by the Tory Treasury and would never come back to Scotland.” 

Willie Duffy, UNISON head of health, said: “We welcome this move by the first minister on the eve of our NHS pay ballot to acknowledge the outstanding efforts of our health workers.

"However, it’s important our NHS workers are acknowledged for the vital work they do each and every day, not just during this pandemic.

“Our dedicated NHS staff have suffered a real-terms pay cut over the last decade and, while this is a move in the right direction, we will now be focussing our efforts on ensuring a significant pay rise for our NHS workers in the forthcoming Agenda for Change pay talks.”

Dr Mary Ross-Davie, director for Scotland at the Royal College of Midwives, echoed his views, welcoming the payments but calling for an “early and significant pay rise for our NHS staff”.