Scottish income tax at 10p - Budget reaction

John Swinney_statement to parliament
Donald-Drysdale By Donald Drysdale, for ICAS

16 December 2015

Donald Drysdale offers a first reaction to the Scottish Budget for 2016/17.

A Budget with few surprises

As widely expected, Scottish Finance Minister John Swinney (pictured above) has proposed that the Scottish Rate of Income Tax (SRIT) for 2016/17 should be set at 10%.

In presenting his draft Budget to the Scottish Parliament, he had his eye on the Holyrood election next May and this could have influenced his decision not to rock the income tax boat.  He has also frozen council tax for the ninth year in succession, perhaps with the same point in mind, but we can expect more fundamental reforms soon in the wake of publication earlier this week of a report by the Scottish Commission on Local Tax Reform.

On other devolved taxes, he left unchanged the main rates and thresholds for Land and Buildings Transaction Tax (LBTT).  However, he followed Westminster’s lead with a new three per cent supplement from 1 April, 2016 on additional residential properties such as buy-to-let investments and homes.

Also from 1 April, the rates of Scottish Landfill Tax (SLfT) are to rise marginally to £84.40 and £2.65, in line with those south of the border, but the Scottish Landfill Communities Fund credit rate will stay at 5.6% which exceeds the planned UK credit rate of 4.2%.

The need for a fiscal framework

The decision to set SRIT at 10% leaves the income tax rates for Scottish taxpayers exactly the same as those elsewhere throughout the UK. This was widely predicted because the economic repercussions of raising or lowering income tax rates in Scotland are unknown even to Mr Swinney in the absence of an agreed fiscal framework, which Scotland’s First Minister Nicola Sturgeon and UK Prime Minister David Cameron have now committed to having in place by February.

Scotland’s new tax-raising powers include not only SRIT, which will apply from 6 April, 2016, but extend also to LBTT and SLfT, both already in place since 1 April 2015.  Tax receipts flowing to Holyrood from these taxes, including the 10 per cent  take from SRIT, will be matched more or less by a reduction in the block grant which is received from Westminster to fund devolved services such as the NHS, education and policing.

The fiscal framework will assume even greater importance once the further devolution proposed by the Smith Commission comes into effect

The required fiscal framework will address how the block grant from the UK Treasury will interact with Holyrood’s tax-raising functions and borrowing powers. While needed now to determine the effects of existing devolved powers, the fiscal framework will assume even greater importance once the further devolution proposed by the Smith Commission comes into effect as a result of the Scotland Bill currently before the Westminster Parliament. This will devolve further tax-raising powers and elements of the welfare system.

What does a Scottish rate of 10 per cent mean?

The impending arrival of SRIT and the way it will work are still mysteries to most Scots.

The rates of income tax paid by Scottish taxpayers on their non-savings non-dividend income will be 10 percentage points below the rates in the rest of the UK, but SRIT will be added on top. The UK basic, higher and additional rates of income tax for 2016/17 have already been announced as 20 per cent, 40 per cent and 45 per cent respectively, and the same rates will now apply to all income of Scottish taxpayers.

Behind the scenes, it’s not quite as simple as that. The revenue collected by HMRC from SRIT will be paid to the Scottish Parliament rather than the UK Treasury. To ensure that the right amount of money is passed over to Holyrood, it will be essential that SRIT is accounted for correctly on all non-savings non-dividend income of Scottish taxpayers, and that UK income tax is accounted for on all their other income.

Individuals who are Scottish taxpayers will be affected by SRIT. HMRC will regard any UK resident taxpayer with a Scottish postal address as a Scottish taxpayer, but this may not always be the case – for example, for those with more than one home in different parts of the UK, with no UK home or with complex affairs. HMRC has already written to individuals whom they believe to be Scottish taxpayers, giving them an opportunity to challenge the position if HMRC’s assumption is wrong.

Employers and pension-providers need to ensure that they operate PAYE correctly, also on pain of penalties

For those within self-assessment, a taxpayer will need to declare their Scottish or non-Scottish taxpayer status on their tax return, and could face penalties for an incorrect declaration – even if no underpayment of tax is involved.

Employers and pension-providers need to ensure that they operate PAYE correctly, also on pain of penalties. They will be issued with new ‘S’ codes for all Scottish taxpayers on their payroll, to ensure that the appropriate Scottish Income Tax Rates are applied. Although we now know that these will be the same as the UK rates for 2016/17, correct use of the ‘S’ codes will still be crucial in quantifying the revenues that will flow to the Scottish Parliament.

Will income tax rates diverge in future?

While Mr Swinney has steered clear of any increase or decrease in Scottish Income Tax Rates on this occasion, this probably won’t remain so for very long.  His Budget has reaffirmed that he and his colleagues share a vision of a more progressive approach to tax policy.

If and when the new Scotland Bill provisions come into effect – expected in April 2017 or 2018 – the Scottish Parliament will acquire wider fiscal powers.  It will be able to vary the income tax rates and thresholds applied to the non-savings non-dividend income of Scottish taxpayers. This will give it many new choices;  for example, it might introduce a zero per cent rate band (thus effectively increasing the personal allowance), reduce the basic rate, raise the higher and additional rates or lower the thresholds for those rates, or even introduce extra rates and thresholds.

So for a while the Scottish Rate of Income Tax, though implemented from April 2016 and having a potential impact on the funding of the Scottish Parliament, will be barely noticeable to the average Scot on the Leith omnibus (to twist a phrase).  But in a year or two they could wake up to find that they face a very different tax scenario from fellow Brits south of the border.

Find out more about SRIT

A new page on features key information on the Scottish Rate of Income Tax (SRIT) which is due to be introduced from 6 April, 2016. Find out more.

Article supplied by Taxing Words Ltd


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