Scottish Budget proposes restructure of income tax

17 Jan 2019

The Scottish Government has published its draft budget for 2018/19, with significant implications for the country’s devolved taxes.

The headline grabbing tax announcement was the government’s plans to restructure the rates and bands of Scottish income tax. This will see the creation of two new rates and bands of income tax (‘starter’ and ‘intermediate’), an increase of 1p in the higher and additional rates of income tax and a narrowing of the basic rate (which will remain at 20%).

Band Income Rate Starter £11,850 - £13,850 19% Basic £13,851 - £24,000 20% Intermediate £24,001 - £44,273 21% Higher £44,274 - £150,000 41% Additional £150,001 and above 46%


Finance Secretary Derek Mackay said that the new rates and bands of income tax would make Scotland’s income tax system ‘fairer and more progressive’ and ensure that those earning less than £33,000 per year –  70% of taxpayers – would pay ‘slightly less’ in tax than they have in the current year.

Mr Mackay also confirmed that the rationale for increasing the higher and additional rates of tax by 1p would ‘generate the most income, with the least risk of losing revenues next year and damaging the economy’. His decision followed the publication earlier this week of a report by the Scottish Government’s Chief Economist, informed by the Council of Economic Advisers that cautioned against greater increases in the higher and additional rates.

Other tax announcements included in the budget included:

Land and Buildings Transaction Tax

A new relief will be introduced for first-time buyers on the first £175,000 of a property purchase.  Taken with the existing zero-rate on homes worth up to £145,000, the Scottish Government says that this mean that 80% of house buyers will pay no LBTT. The move mirrors the decision by the UK Government in November’s Autumn Budget to introduce Stamp Duty Land Tax (SDLT) relief on purchases of up to £300,000 (on properties worth up to £500,000).

Business Rates

The finance secretary confirmed to the Scottish Parliament that he would implement the remaining recommendations of the Barclay Review of Business Rates with the exception of removing charitable relief for universities or council arm’s length organisations (ALEOs).  The Scottish Government also confirmed plans to replicate the UK Government’s decision to link business rate increases to the consumer price index (CPI).

Political reaction

Shadow Finance Secretary Murdo Fraser (Conservative) said the Scottish Government had ‘broken their promise to the Scottish people’ by increasing income tax, citing 53 occasions during the 2016 Scottish election campaign where SNP politicians had pledged not to increases taxes for those paying the basic rate.  He added that increases in the Scottish Government’s block grant from Westminster provided further evidence that there was ‘absolutely no justification’ for increasing taxes.

Scottish Labour leader Richard Leonard took an opposing view, saying the government was merely ‘tinkering around the edges’ when it came to tax. Scottish Green co-convener Patrick Harvie sought to take some of the credit for the government’s tax proposals, adding that his party had been ‘leading the argument for reform’ for the last 2 years. Willie Rennie, for the Scottish Liberal Democrats, accused the government of making a U-turn on tax, proposing a ‘modest’ increase in tax that ‘we (Liberal Democrats) argued for at the election and one that he (SNP) opposed.’

CIOT’s view

Moira Kelly, chair of the CIOT’s Scottish Technical Committee, said that the proposals would introduce additional complexities for Scottish taxpayers, while warning that the measures put forward by the government should be considered alongside the wider UK tax and benefits regime.

In particular, the Institute said that the introduction of a new starter rate of tax could pose complications for some people in receipt of benefits, while the creation of an intermediate rate in addition to the starter rate could have implications for people in receipt of Marriage Allowance.

What happens now?

The Scottish Parliament will consider the Budget (Scotland) Bill in three stages, starting in January and concluding at the end of February. As a minority administration, the SNP-led Scottish Government must secure the backing of at least one other opposition party to ensure that its proposals are passed into law. As a result, we may expect to see some horse-trading between the parties as the government looks to secure a parliamentary majority for its tax and spending plans.