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Examining the draft Scottish Budget

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Highlights from the draft Scottish Budget 2019/20 include: the income tax higher rate threshold will remain frozen at £43,430 in 2019/20, widening the gap between this threshold and the UK higher rate threshold, which will be £50,000 in 2019/20; the additional dwelling supplement for land and buildings transaction tax will rise from 3% to 4% from 25 January 2019; the LBTT non-residential transaction rates and lower rate threshold will change with effect from 25 January 2019; the rates of Scottish landfill tax will be increased by inflation to keep these rates in line with landfill tax charges in the rest of the UK; and the introduction of air departure tax (originally expected to be devolved with effect from 1 April 2018) and the aggregates levy continue to be deferred. Note, however, that the Scottish government does not command a majority, so these proposed changes are not yet set in stone.

Devolution has introduced new opportunities, but also new complexities. There are many moving parts to manage such as the interaction with the UK Budget, understanding how the block grant adjustments work, and the politics of managing perceptions. Such matters can be seen at work in this Scottish budget, announced on 12 December, and with much of the focus on Scottish income tax rates and bands. It’s not set in stone either: this is a minority government, and it will need to reach agreement with others.

Scottish income tax 2019/20

The rates and bands for 2019/20 are as follows and assume the Scottish taxpayer is in receipt of the standard UK personal allowance of £12,500 (reduced by £1 for every £2 earned over £100,000).
The starting and basic rate bands have been increased by inflation whereas the higher rate threshold has been frozen.
The Scottish Parliament is responsible for setting the income tax rates and bands applicable to Scottish taxpayers’ non-savings, non-dividend (NSND) income. HMRC is responsible for its collection and management, including the designation of who qualifies as a Scottish taxpayer (broadly determined by place of residence).
Scottish taxes do not sit in isolation: they are interwoven with the UK tax regime and there are connections and constraints which this imposes. Two particular examples of this are as follows:
  • The personal allowance is set by Westminster and applies to all UK taxpayers, with the effect that a significant proportion of the Scottish population are lifted out of income tax (44.6% in 2019/20). This in turn makes the Scottish taxpaying base smaller.  
  • The higher rate income tax threshold is set by Westminster and only applies to the rest of the UK indirectly. This challenges options because there is a seemingly automatic reaction by the public to compare any devolved tax measure with that in the rest of the UK.

National insurance

There are NIC-shaped elephants in the room. One is the increase in NIC for any UK taxpayer as a result of the UK Budget on 29 October. The UK higher rate threshold for income tax has gone up to £50,000, and the UK NIC upper threshold mirrors this. However, whilst the UK basic rate band for 2019/20 may have widened by £3,000, the NIC 12% band, which applies across the whole UK including Scotland, has widened by £3,442. 
The other elephant in Scotland is due to the interaction (or lack of it) between the UK wide NIC upper threshold of £50,000 and the devolved higher rate threshold for Scottish income taxpayers. Scottish taxpayers with income in between £43,430 and £50,000 will pay a combined rate of 53% (41% Scottish income tax and 12% NIC). This was a concern in 2018/19 but this budget is widening the 53% gap in 2019/20.

Mind the gap: possible behaviours

With the gap between the higher rate thresholds widening between Scotland and the rest of the UK in 2019/20, there may be behavioural consequences. For example, if a person is in a position to mitigate their tax bill by incorporating and paying themselves up to the personal allowance with the remainder by dividend, this would divert any tax payable into the UK exchequer and away from Scotland altogether.
It is also possible that employers may decide to reconfigure remuneration packages to enable their employees to exchange cash pay for NIC-efficient items such as pensions or holidays; or for individuals to increase their pension contributions or reduce their workload and hence their taxable pay. These are all small measures, but nevertheless, they are measures which could add up across the piece.

Land and buildings transaction tax (LBTT)

Changes are proposed to LBTT as follows from 25 January 2019:
  • the rate of additional dwelling supplement will change from 3% to 4%, and
  • non-resident LBTT is to be amended such that an anticipated two thirds of all non-resident transactions will result in less LBTT payable, as set out below.
Current LBTT non-residential rates and bands (up to and including 24 January 2019) are:
The proposed rates and bands from 25 January 2019 are:
The draft Scottish Budget also announced the intention to introduce two reliefs from LBTT for property investment funds. There was no suggestion, however, to mirror the recent UK budget announcement to consider a SDLT charge on non-residents.

Scottish landfill tax

From 1 April 2019, the Scottish landfill tax rates will increase in line with inflation.

Air departure tax (ADT)

ADT remains in the hangar, and it is likely to remain there for the foreseeable future. The delay in implementation is due to state aid rules.

VAT assignment

VAT assignment is to be effective from 2020/21 but with a transitional year commencing 2019/20. In essence, it is a funding mechanism, designed to bring further linkage to the Scottish economy. Although it may bring significant revenue, the Scottish government will have no direct levers to exercise in relation to its amount. The method of assignment is detailed at

What happens next ?

The process to be followed is for the Budget to go through the Scottish Parliament. The expected timetable is: stage 1 in late January; followed by stage 2; the Scottish rate resolution; and then stage 3 when the budget should be agreed.