(Bloomberg) -- Crossing the Royal Border Bridge after the 45-minute train journey from Edinburgh into the sleepy town of Berwick-upon-Tweed, it’s hard to tell you’ve traveled from Scotland into England. One look at your tax payment for the month will give you a better idea.
Live in Scotland and your income tax bill rises as soon as you earn about £26,500 ($34,750) a year – less than the UK average. As your salary rises, the government takes an ever larger slice, such that an Edinburgh resident earning £250,000 would hand over about £9,000 more to the government than their counterpart in London.
With focus turning to how Chancellor of the Exchequer Rachel Reeves plans to balance the UK’s books, the ruling Scottish National Party north of the border needs to assess how to foster economic growth in the event that Westminster in London reduces annual payments to Holyrood in Edinburgh. They add up to more than £40 billion this financial year.
While the UK’s Labour government may be preparing to target the rich, people in Scotland — particularly those in the upper income brackets — are braced for an extra dose of pain.
But as Deputy First Minister Kate Forbes noted at the SNP’s conference last weekend, any attempt by her party to wring out more taxes from high earners risks spurring an exodus. That, in turn, would crimp revenue for Holyrood and, longer term, the Scottish economy.
It’s a point echoed by one of the country’s best-known retailers. Patrick Birkbeck, the English-born managing director of boutique countrywear outlet House of Bruar, boils it down to a simple equation.
“The end result is not just the loss of tax, but the loss of spending that goes on up here,” he said from his sprawling site in the Highlands.
The Scottish Parliament has had full control over income tax rates and bands since 2017, and, because the ruling SNP spends more on some social policies than its counterpart in Westminster, the tax take tends to be higher. The top rate, which kicks in at £125,140, is three percentage points more than in England.
National Identity
Scotland has control over education, transportation, justice and health, while the UK Parliament manages broader economic issues, foreign policy and defense.
In return for paying more tax, Scottish residents get such things as free medical prescriptions and don’t pay university tuition fees. That tends to mean Scotland is more affordable than England, according to LivingCost.org, although Edinburgh still works out as one of the more expensive cities in Britain.
Keeping that Scottish identity — which extends to its overwhelming majority to reject Brexit — is a key part of the SNP’s DNA, but it all costs money.
The Scots habitually vote for a less fiscally conservative governments than the rest of the UK. The same center-right Conservative Party that dominated Westminster for much of the 20th century and beyond hasn’t won a Scottish election since the 1950s.
Regardless of who is in power, the 96-mile border from the Solway Firth in the west to Marshall Meadows Bay in the east risks becoming more significant than a simple line on a map. Moving between the countries is easy. No visas are required.
Moving to Berwick on the English northeast coast or to Carlisle in the northwest may seem a drastic measure for a Scottish resident, but it could boost their net annual income by thousands of pounds. Levies on buying a home in England are also lower.
And after Finance Minister Shona Robison announced spending cuts worth £500 million to balance the budget, there may be even less reason to stay.
“There are a number of young couples and high earners who do their sums and realize they’d be a lot better off south of the border,” said Berwick estate agent Patrick Paton. He also noted that the siren calls of a mass flight from Scotland exodus have been sounded before.
Interest from potential Scottish buyers tends to peak and trough depending on political and economic uncertainty, he said. Business was brisk during the Scottish independence referendum of 2014, but the drubbing that the SNP received in the July general election suggests the appetite for fundamental change north of the border has stalled.
On the Agenda
While the public are generally more disposed to the distribution of wealth, the issue of tax looms ever larger in the Scottish mind, according to William Hunter, the director of Edinburgh-based Hunter Wealth Management.
“Tax and tax mitigation is now a staple of every meeting that financial advisers in Scotland undertake,” Hunter said.
He advises most of his clients to make use of programs open across the UK, but which become “more of an imperative” for Scottish taxpayers. Among the options: Enterprise Investment Schemes, Venture Capital Trusts, and increasing pension contributions to shield money from the taxman.
If high taxes do drive some people out of Scotland, it begs the question how they impact those contemplating a move north.
Education in Edinburgh
At Eden Scott, a recruitment agency in Scotland covering industries including financial services, the tax take is a topic that’s brought up when trying to lure potential talent from England, according to chief executive officer Michelle Lownie.
“It’s another thing to contend with,” she said, adding that the levy on house sales is another hurdle. “It’s about having a whole package, and higher taxes is just another thing taking away from that.”
The tax grab is coming for the whole of the UK, but the Labour Party’s commitment to make private education fees subject to sales tax will cut deep in Edinburgh, where one in four children attends a non-state school. That’s almost double the proportion in London, and much higher than the 4% of children who attend private establishments in Scotland in general.
Hunter at his wealth advisory firm says the incoming extra expense is “terrifying” his clients.
Whether they’d opt to move south is more of a leap, although Berwick is partly used to having a foot in both camps — control of the town shifted at least 13 times until the late 15th century. But for now, all eyes are on what’s being trailed for Reeves’s budget next month.
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