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UK income tax differential widens under Scottish budget proposals

ANALYSIS: Yesterday's draft Scottish budget makes it clear that the government has no intention of narrowing the growing income tax differential between Scotland and the wider UK.13 Dec 2018

While increasing starter and lower rate thresholds in line with inflation, to £12,500 and £14,549 respectively, Scottish finance secretary Derek Mackay announced that the threshold at which the higher rate kicks in would be frozen at £43,430.

Against a backdrop of Brexit uncertainty, Mackay's budget may not be leading the news agenda - but its impact will be significant, deepening as it does a now clear path of fiscal divergence for the country.

Back in October, Phillip Hammond's UK budget raised the threshold for upper rate income tax to £50,000. The higher rate of income tax applicable in the rest of the UK is 40%, compared to 41% in Scotland. In the build-up to the Scottish budget, business groups such as the CBI raised concerns over the impact that any further divergence could have on Scotland's competitiveness, specifically the ability of companies to attract and retain talent.

Heralding the move as evidence of the Scottish government's commitment to a progressive system of taxation, Mackay championed the budget as having "fairness, equality and inclusiveness at its heart". He went on to outline an array of public spending increases, including almost £730 million for health and care services, and a £210m increase to local government funding - a response to sustained pressure from councils in recent months.

Responding to the budget, the Conservative Party's finance spokesman Murdo Fraser attacked the Scottish government's widening of the tax differential, while the Labour Party's James Kelly said that Mackay's plans were "timid" and called for a "radical" budget. Meanwhile Patrick Harvie, the leader of the Scottish Green Party, called for the Scottish government to bring forward comprehensive plans for local tax reform and replace council tax.

Harvie's comments are worthy of particular attention because, as a minority government, the SNP will require the support of one other party in order for the budget to be passed by parliament and receive Royal Assent by the end of March 2018. The Scottish Green Party is the most likely contender to lend support, and horse-trading with the SNP can therefore be expected over the coming months.

Andrew Henderson is a public policy expert at Pinsent Masons, the law firm behind Out-Law.com.