Tax experts have warned that Scotland’s poorest health and care workers could lose up to 75% of the £500 bonus pledged by Nicola Sturgeon because it will not be tax-free.
The Chartered Institute of Taxation (CIOT) said the lowest-paid workers who receive universal credit would be penalised the most because the extra income would be deducted from their welfare payments, while a leading economics thinktank criticised it as bad policy.
The first minister announced during her keynote speech at the Scottish National party’s annual conference on Monday that 391,000 NHS and social care workers would get up to £500 as a one-off Covid bonus, at a cost of £180m.
Sturgeon appealed to Boris Johnson to use the UK government’s powers to make that tax-free, implying it was the morally right thing for the prime minister to do, but that request was rejected by the Treasury.
It said that as the Scottish government set and received Scottish income taxes, it could increase the bonus to make sure recipients got the full £500 in their pockets and recoup that tax from their pay packets.
The CIOT’s Low Incomes Tax Reform Group said on Tuesday that NHS and care workers on universal credit who earned the Scottish median salary of £25,200 could only get £123.95 after taxes and national insurance, because the welfare system deducts 63p from every extra pound of earnings.
Joanne Walker, a CIOT official, said Sturgeon was right to argue that making the payment tax-free would prevent that happening, but said Wales had been through a similar situation before with the Treasury.
The Welsh government was the first to pay public employees a £500 Covid bonus by giving it to 65,000 social care workers in May. It also asked the Treasury to make it tax-free, but the Treasury said since Wales set and received its income taxes, it should increase the bonus to a level high enough to cover the tax take.
Welsh government officials confirmed on Tuesday they also knew about the impact on workers on universal credit: Welsh trade unions warned in June those employees would lose up to £375.
Scottish government sources said they knew about the issues affecting the Welsh payments before Sturgeon’s speech, but insisted that should not have deflected the first minister from making her offer.
One official said it raised fresh questions about how fair the UK government’s tax and welfare systems are, and made the case for those systems to be under full Scottish control.
The CIOT’s warning came after the Fraser of Allander Institute (FAI), a leading economics thinktank based at the University of Strathclyde and run by Alex Salmond’s former head of policy, Professor Graeme Roy, criticised Sturgeon for insisting the bonus should be tax-free.
In a blog cowritten by Roy, the FAI said Sturgeon’s offer to reward health workers was understandable. It said that even if the Scottish government recouped the income tax, the Treasury would still earn £60 per £500 in national insurance payments, which were not collected in Scotland.
However, the FAI said it would be bad policy to make bonuses tax-free, arguing it was not a progressive way of distributing money, and undermined the social contract of the tax system that meant everyone contributed fairly.
“Exempting bonuses from tax appears at odds with the context of the existing progressive tax system,” the blog said. “[It] would gift higher rate taxpayers a significantly larger tax break than basic rate taxpayers. It is really not clear what the rationale for this would be.
“[If] policymakers want those employees to benefit by £500 after tax, the solution is to pay a higher gross bonus. There is little reason for these rewards to be exempt from the existing social contract, or for them to require administrative and legislative hurdles to implement.”