OK. Hands up those that think Scotland will have lower rates of Income Tax in the future once the Smith Commission recommendations are enacted. No? Me neither. In fact if you do have your hand in the air can you please send me some of whatever you are taking as I think I may need it!
There has been a dramatic change in the political landscape here with parties publicly vying to be more left wing than the other, and in this environment it is virtually certain the highest rate of tax will be 50% if not more. Given the Scottish Government will also be able to set the bands that Income Tax will be paid at, it is also possible the level at which higher rates start may be less than at present.
The Smith Commission announcement came a day after Legal and General published a report which provides a snapshot of Scotland from a personal finance point of view. It showed that 1/3 of households in Scotland have NO savings at all, and the average level of savings in households throughout the country was £670! So given this background, who will have to foot the bill when it comes to Scotland's Income Tax?
It is likely the recommendations made in the report will be included in the Queen's speech next May irrespective of the result of the General Election and I would guess it is unlikely that Income Tax altering powers will come into being before tax year 16/17 at the earliest. But to say this has opened a can of worms in the meantime is an understatement. The questions that are up in the air, and are likely to remain there for some time, are huge.
How will the tax be collected? Who will pay it? Will tax relief on pensions and charitable donations be allowed at the Scottish higher rate or the UK? If you live in Scotland but work in England, or vice versa, are you liable to UK or Scottish Tax? I could go on.
It is not only in Scotland that we have uncertainty. The result of the UK General Election is impossible to predict and depending on its outcome we could well see rises in other areas such as Capital Gains Tax or Inheritance Tax. Irrespective of the party that wins an election it is always the first post-election budget that contains the "nasty" tax rises, so the next six months could end up being the most benign tax regime we will have for some time.
So what can we do other than have a stiff drink?
Well, for starters the changes to the taxation of pensions on death appear so generous it would be no surprise if there was a bit of giving on one hand but taking more with the other. In this case I would not be surprised to see the removal of higher rate tax relief on contributions, and in case this does occur I suggest that higher rate payers with the ability to make significant contributions should consider doing so sooner rather than later.
Business owners that have been accumulating cash in their companies should seriously consider taking cash out under the current rules, especially if they feel they may have a need to do so in the next few years as I very much doubt if the tax treatment will be more beneficial than it is now.
For everyone else making as much use as possible of your allowances such as ISAs, Capital Gains Tax exemptions and the like is always sensible but probably more so than ever just now, as if you don't you cannot go back and do it later.
Lastly, something for the Scottish Government to ponder - it is reported that the highest 1% of earners in the UK pay 30% of all Income Tax collected. In Scotland the percentage may be slightly less, but if we do see a major difference in tax rates between Scotland and the rest of the UK in the future it may be that a lot of those high earners will find moving away attractive as, let's be honest, nobody stays in Scotland for the weather.