The Scottish Government set out, in a paper entitled “The Role of Income Tax in Scotland’s Budget”, the background as to how Scotland should use its Income Tax raising powers to start a debate on how they finance public services and grow the economy. The paper further sets out four tests that any changes to income must meet, namely:-
So, with all of this in mind, the Scottish Budget was billed as potentially the most contentious in Holyrood’s history as it was widely predicted that major changes in the way Income Tax is levied, north of border, would be announced by Derek Mackay, the Finance Minister.
What the budget did deliver was an increase in public sector spending and an increase in public sector pay of 3%, falling for those earning over £30,000, which is a significant increase over the 1% for the rest of the UK. He also decided to mirror the rest of the UK with the changes to Stamp Duty, announced last month, by providing an exemption from Land and Buildings Transactions Tax (LBTT) to first time buyers in Scotland for properties costing less than £175,000. This was previously set at £145,000 so this additional £30,000 exemption will save first time buyers £600. However, rather than bring in this change immediately he will consult on the introduction of First Time Buyers Relief and seek to introduce it in 2018/19.
To help businesses, he also decided to change the method for calculating business rates from RPI to the lower CPI which had been called for by many businesses in Scotland.
The biggest changes were reserved for Income Tax, which the finance minister trailed as a more progressive system that will see those earning below £33,000 paying less tax in Scotland than the rest of the UK.
These changes have resulted in a number of new Scottish Rates of Income Tax, including a starting rate band of 19% and intermediate rate band 21%. In addition the Scottish higher rate tax band will increase by inflation from £43,000 to £44,273 (compared to £46,350 for the rest of the UK).
As a result of these measures, a five band income tax system has been created for those taxpayers resident in Scotland. Therefore, from 6 April 2018 the Scottish Rates of Income Tax will be as follows:
|Starting Rate Band||11,851 - 13,850||19%|
|Basic Rate Band||13,851 - 24,000||20%|
|Intermediate Rate Band||24,001 - 44,273||21%|
|Higher Rate Band||44,274 - 150,000||41%|
|Additional Rate Band||150,001 +||46%|
It should, however, be noted that the above rates and tax bands will only apply to earned income i.e. wages, self employment income and pension income; they will not apply to savings income. As a result individuals will continue to pay the same tax rates as the rest of the UK on dividends and savings interest.
It was clear that the Finance Minister and the Scottish Government felt that this increase in complexity delivered on their four key objectives for Income Tax in Scotland and delivered a fairer tax system. What will be interesting is whether, in November next year, the Chancellor looks to these changes and their impact and decides to follow suit if they are seen to be successful.
Scott McIver, Dumfries Tax Consultant
Graham Poles, Tax Partner