When Boris Johnson announced that, if he becomes the next prime minister he would increase the 40% tax threshold from £50,000 to £80,000, there was a degree of scepticism as to whether he could deliver on what at first appears to be an exceptionally generous promise. Might this just be another exaggerated claim similar to the infamous advert that exiting the EU would lead to another £350m a week going to the NHS?
There have been no red buses in sight just yet but, then again, little in the way of detail has been revealed – other than the cost to the Treasury being in the region of £9.6bn and that the change would lead to three million taxpayers rejoicing in the fact their income tax liability will reduce. Part of this happy band will be MPs as their salaries currently stand at £79,468 a year – just below the proposed threshold.
A word of warning though – before those lucky enough to benefit start planning how to spend the money saved, the devil will be in the detail and it may contain some disappointment.
In all likelihood the increase to the higher rate tax threshold will be phased in over a period of years rather than in one go. The biggest downer, though, will be that the upper earnings limit for National Insurance (NI) will increase in line with changes to the higher rate tax threshold so the combined income tax and NI will be reduced from 42% to 32% – saving only 10% and not 20%, as many may have thought.
Where the fun really begins is that Scotland and Wales have their own tax-raising powers. The Welsh government has more limited scope in that it has no control over tax bands but can adjust the rates of tax payable and, as in Scotland, it has no control when it comes to the taxation of savings and dividend income. For 2019/20, the Welsh government has opted to keep the rates aligned with England and Northern Ireland.
The Scottish government, on the other hand, not only has different rates but has also introduced five tax bands. For 2019/20, for example, Scottish taxpayers, who have a full personal allowance, start to pay higher rate tax on earnings over £43,430 compared with £50,000 for the rest of the UK and at a rate of 41%.
So, for this tax year, someone living in Scotland and earning a salary of £80,000 pays £1,844 more in tax than the rest of the UK. If the higher rate tax threshold were to increase to £80,000 for the rest of the UK and Scotland retained it current bands and tax rates, then the difference rockets to £7,844. There would also be the increase in NI of £3,000, which would apply throughout the UK.
Now, for the few fortunate pensioners who are higher rate taxpayers and, say, living in Brighton, they will have the benefit from a potential tax cut of £6,000 as they are not impacted by the increase in NI. Someone on an £80,000 salary working in Newcastle would be £3,000 better off but, if they were to consider accepting a job in Edinburgh on the same salary, they would be almost £8,000 the poorer.
Tax ‘tipping point’
There is a tipping point when people will start to make changes in the areas where they consider they are paying too much tax. A good example of this was when the additional rate of tax was increased to 50% and led to the total tax paid by additional rate tax payers actually reducing.
Currently, we are hearing of doctors and consultants going part-time or retiring early due to the impact of breaching the annual allowance and the subsequent tax liabilities being generated.
Many self-employed may now consider this as the time to incorporate and pay themselves mainly by way of dividends, as this can significantly reduce or even remove their NI liability and, if based in Scotland, they will have the additional incentive of being able to benefit from the proposed increased higher-rate threshold.
For high-earners who are resident in Scotland, the differential may not yet be significant enough to encourage them to jump on a bus and head south, but it may well deter those whose skills are required, such as doctors, from considering coming to work in Scotland.
It will also be a major factor for national employers considering where to recruit and base staff. One major bank in Scotland has already had requests from staff for a ‘Scotland Living Allowance’ and this in part has led the business to focus on recruiting higher-paid jobs in the likes of Manchester.
If he does end up as PM, it will be interesting to see if Boris delivers on his promise. What may prove more fascinating is the impact of such a change on Scottish tax policy. What may be seen as a tonic for many in the south, will be a major headache for those governing in the north.
Now, where is that bus timetable.
Neil MacGillivray is head of technical support at James Hay