40,000 children could be helped by freezing 41p tax threshold, think tank says

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Scottish ministers could raise enough cash to lift 40,000 children out of poverty by freezing the point at which people start to pay higher rate income tax, a think tank has suggested.

Analysis by IPPR Scotland suggested keeping the threshold for the 41p tax band at £43,430 – instead of raising it in line with inflation – could generate up to £210 million in additional revenue by 2021-22.

Finance Secretary Derek Mackay will set out his tax plans for Scotland when he delivers his Budget to Holyrood on December 12.

But he has already made clear he will not follow UK Chancellor Philip Hammond, who used his most recent Budget to announce the threshold for the 40p tax rate south of the border is being increased to £50,000 from next April.

Now IPPR Scotland is urging the Finance Secretary to consider freezing the threshold for the higher rate of tax – saying this could help tackle child poverty while still providing a tax cut for all.

Higher rate tax earners in Scotland would still receive a tax cut in 2019-120 of £139.50 in cash terms, the think tank calculated, due in part to an increase in the personal allowance.

Rachel Statham, IPPR Scotland economic analyst said: “If tax bands go up with inflation as usual, higher earners in Scotland – those earning over £43,430 a year – could receive a tax cut over three times larger than someone earning minimum wage.

“At a time when public finances are under considerable strain, Scotland can’t afford this.

“By freezing the higher rate tax threshold, the point at which earners begin to pay the 41p tax rate, we could raise additional tax revenue.

“This could be spent on the Scottish government’s clear priorities, like ending public spending cuts or investing to lift tens of thousands of children out of poverty.

“What’s more, this measure could still ensure that all tax payers in Scotland receive a tax cut in cash-terms compared to last year, with higher earners benefiting no more than lower earners.”

John Dickie, director of the Child Poverty Action Group (CPAG), said the intervention by the think tank was “a hugely welcome demonstration of how Holyrood’s tax and benefit powers can be used to make a dramatic impact on child poverty in Scotland”.

He added: “With UK government benefit cuts driving more and more families into hardship the Scottish Parliament must use every tool in its toolbox to protect Scotland’s children and meets its own statutory child poverty targets.

“This new analysis demonstrates the kinds of impact that can be made now. MSPs must work together as a matter of urgency to ensure the forthcoming budget boosts family incomes and fulfils its potential to lift tens of thousands of children out of poverty.”

Labour finance spokesman James Kelly also welcomed “the hugely significant report that shows the power of taxation to deliver real change”.

He said: “Income tax is devolved and, as this important report makes clear, making different choices on the higher rate threshold in Scotland could lift 40,000 children out of poverty.

“The SNP must deliver a progressive tax system that meets the needs of communities across Scotland.”

A Scottish Government spokesman said: “Tackling poverty and inequality is a central mission of the Scottish Government which is why we brought forward the Child Poverty Act, with its ambitious new targets to end child poverty by 2030.

“Following the changes introduced earlier this year, more than two-thirds of taxpayers will pay less on their current income this year under Scotland’s new tax bands, and low-earning taxpayers are protected through the introduction of a new Starter Rate of tax, meaning an additional £428 million in 2018/19 for vital public services and the economy.

“We are investing over £125 million this year to mitigate against the worst of welfare cuts and to support those on low incomes, but Universal Credit, and the legacy benefits it replaces, remain reserved to the UK Government so we have no powers to scrap the two child limit or lift the benefit cap.”

A UK Government spokeswoman said: “With this Government’s changes there are a near record low number of children in workless households in Scotland, boosting their prospects in life.

“We continue to spend around £90 billion a year on working-age benefits, including for those on low incomes, and with Universal Credit people are moving into work faster and staying in work longer than under the old system.”

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