The Scottish Budget – a snapshot of the tax measures
The Scottish Budget took place on 9 December 2021 and the key tax points are outlined below.
In summary, there was little change to the devolved taxes. However, tax is only a part of the overall Scottish funding package, which is based on the Barnett Formula and governed by the fiscal framework.
Scottish income tax
The five Scottish income tax rates, levied on non-savings, non-dividend income will remain unchanged in 2022-23, whereas the rate thresholds have changes to the starter and the basic rate bands only, with the higher rate and additional rate thresholds frozen.
The proposed income tax rates and bands are as follows:
2021-22 | 2022-23 | ||||
|---|---|---|---|---|---|
Band | Rate | Band | Rate | ||
Starter | Over £12,570* - £14,667 | 19% | Over £12,570* - £14,732 | 19% | |
Basic | Over £14,667 - £25,296 | 20% | Over £14,732 - £25,688 | 20% | |
Intermediate | Over £25,296 - £43,662 | 21% | Over £25,688 - £43,662 | 21% | |
Higher | Over £43,662 - £150,000** | 41% | Over £43,662 - £150,000** | 41% | |
Top | Above £150,000 | 46% | Above £150,000 | 46% | |
*Assumes individuals are in receipt of the standard Personal Allowance.
**Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.
Scottish taxpayers with income of less than £27,850 will pay less tax than anywhere else in the UK, while those earning more than £27,850 will pay more in tax. Further analysis of the impact of the Budget, with (i) comparisons for a Scottish taxpayer between years (2022-23 and 2021-22), and (ii) in the fiscal year 2022-23 between Scottish and rest of UK (rUK) tax payers, can be found in a Scottish Government factsheet.
A further consideration for those Scottish taxpayers with an income that sits between the Scottish and rUK higher thresholds (i.e., between £43,662 and £50,270) is the high marginal rate of deductions. No doubt, low level tax planning (e.g., pay more pension contributions, take unpaid leave) will continue for those in this income bracket to minimise the overall effective rate of tax and NICs of 54.25% (compared to 33.25% in the rest of the UK) once the additional NIC is factored in, in 2022-23, and beyond this with the additional Health and Social Care Levy.
Paying more Scottish income tax does not necessarily equate to Scotland having more revenue however, because tax is only a part of the devolved funding package, which is governed by the fiscal framework. Under the Fiscal Framework, if Scottish devolved tax revenue per person grows relatively faster than in the rUK the Scottish Budget is better off, and vice versa. This means that Scotland’s budget is influenced not only by tax policy and economic performance in Scotland, but also by tax policy and economic performance in the rest of the UK.
Fully devolved taxes – LBTT and SLfT
The residential and non-residential rates and bands of Land and Buildings Transaction Tax (LBTT) are to remain unchanged.
A call for evidence on the operation of Additional Dwelling Supplement (ADS) is to be issued shortly, although the Scottish Government has noted that this will not question the premise of the tax, or the rate at which it is charged (currently 4%) – it is to look at how ADS operates in practice.
And it remains to be seen if the UK government consultation on Stamp Duty Land Tax mixed use of property and multiple dwellings relief may lead to changes in the rest of the UK, followed by similar changes in Scotland to LBTT.
The standard rate of Scottish Landfill Tax (SLtF) will increase to £98.60 per tonne and the lower rate to £3.15 per tonne in 2022-23, maintaining consistency with Landfill Tax charges in the rest of the UK – it is not considered sound policy to have differentials between Scotland and the rest of the UK, which would only encourage tax avoidance and ‘waste tourism’.
Non-domestic Rates
The 100% rates relief for the retail, hospitality and leisure sectors will end on 31 March 2022, with a 50% relief continuing for the first three months of 2022-23, capped at £27,500 per ratepayer. The poundage has been increased by 0.8p to 49.8p, a less than inflationary increase, which gives Scotland the lowest poundage rate in the UK.
For the future…
Scotland’s first Framework for Tax will be published later this month setting out the Scottish Government’s approach to the design and delivery of tax policy in Scotland.
The Scotland Act of 2016 provided for the devolution of powers around both Air Passenger Duty and Aggregates Levy, neither of which have yet been introduced. The Scottish Budget notes that the Government remains committed to introducing Air Departure Tax when a solution to the Highlands and Islands exemption issue has been found (which revolves around issues of state aid); meanwhile APD will remain chargeable by the UK Government.
In relation to Aggregates Levy, the plan is to continue to progress work on a devolved levy, with the introduction of the necessary primary legislation in the current session of the Scottish Parliament.
As for VAT Assignment, it has been put off into the forthcoming Fiscal Framework review discussions.