What are the main tax takeaways from the Scottish Budget?

13 Dec 2018

On Wednesday of this week, the Scottish Government published its draft Budget for 2019/2020. This included its plans for the devolved taxes over which it has control, namely, Scottish Income Tax, Land and Buildings Transaction Tax (LBTT), Non-domestic (Business) rates and Scottish Landfill Tax.

There remains no progress in finding a solution to the State Aid issues preventing the ‘switch on’ of Air Departure Tax, the devolved replacement for Air Passenger Duty (APD). For the time being, APD policy remains the responsibility of the UK Government.

The budget also proposes policy measures in a number of areas identified where the Chartered Institute of Taxation and others have called for action. These are measures to clarify the rules around LBTT and group relief; and progress towards improving the scrutiny of devolved tax policy.

A summary of the main points is as follows:

Income Tax

In 2019/2020 the Scottish Government proposes to freeze the 5 rates of Scottish Income Tax (paid on non-savings, non-dividend income) at 2018/2019 levels.

It means that the starter rate of tax will remain at 19 per cent, the basic rate at 20 per cent, the intermediate rate at 21 per cent and the higher and top rates of tax at 41 per cent and 46 per cent respectively.

The biggest income tax announcement from Derek Mackay’s speech was his decision to freeze the higher rate income tax threshold at £43,430 next year.

This means that Scottish taxpayers earning between £43,430 and £50,000 will now pay a higher rate of income tax than those south of the border, who will pay just the basic rate of 20 per cent.

The misalignment between the higher rate of Scottish income tax and National Insurance Contributions (NICs) – first identified last year – will continue into 2019/20. It means that someone earning a salary in the range of £43,430 to £50,000 will pay 41 per cent in income tax and a further 12 per cent in NICs on the top slice of their earnings, equivalent to a marginal tax rate of 53 per cent.

The level of income at which people start paying the basic and intermediate rates of income tax is to rise by inflation. The proposed rates and bands for the coming year are shown in the table below:

Bands Band name Rate £12,500 - £14,549 Starter 19% £14,550 - £24,944 Basic 20% £24,945 - £43,430 Intermediate 21% £43,431 - £150,000 Higher 41% £150,001 + Top 46%


Land and Buildings Transaction Tax

The Scottish Government proposes to retain the current rates and bands of LBTT for residential transactions at 2018-19 levels. It proposes increasing the Additional Dwelling Supplement from 3 per cent to 4 per cent. If approved by the Scottish Parliament, this measure will come into force on 25 January 2019 and would not apply to transactions entered into before 12 December 2018, the date of the Scottish Budget.

In respect of non-residential LBTT, the Scottish Government will reduce the lower rate of non-residential LBTT from 3 per cent to 1 per cent, increase the upper rate from 4.5 per cent to 5 per cent, and reduce the starting threshold of the upper rate from £350,000 to £250,000. These changes would also take effect from 25 January 2019 if approved by Parliament and would not apply to pre-12 December transactions.

Although not covered by the Finance Secretary in his speech, the Scottish Government confirmed in its budget document that it is to consult in 2019 on plans to introduce two targeted LBTT reliefs. These are reliefs for the ‘seeding’ (initial transfer) of properties into a Property Authorised Investment Fund (PAIF) or Co-owned Authorised Contractual Scheme (CoACS); and a relief for when units in CoACS are exchanged.

The Chartered Institute of Taxation, along with the Law Society of Scotland and Institute of Chartered Accountants of Scotland (ICAS) were among the first organisations to raise concerns relating to the need for these reliefs with the Scottish Government in 2017 and 2018.

Scottish Landfill Tax

The Scottish Government proposes to increase the standard rate of SLfT to £91.35 per tonne and the lower rate of SLfT to £2.90 per tonne in 2019-20. This is in line with RPI inflation and ensures consistency with Landfill Tax charges in the rest of the UK.

Non-domestic (Business) Rates

Derek Mackay confirmed that the Scottish Government will not proceed with plans to introduce an additional levy on online and out of town businesses. This follows pressure from a range of business organisations who voiced their opposition to the plans. Earlier this year, the Chartered Institute of Taxation voiced its concerns over the administration of such a scheme, warning that it would be a bureaucratic burden for councils to administer.

New measures introduced by the Budget include a below-inflation increase in the non-domestic rates poundage, an enhanced 100 per cent fibre broadband relief and a continuation of the transitional relief cap for Aberdeen City and Aberdeenshire.

Progress towards a Scottish Finance Bill?

The Budget document confirmed that the Scottish Government intends to take forward discussions with organisations including the Chartered Institute of Taxation to develop “a new process for the planning, management and implementation of changes to the fully devolved taxes”.

This measure was first announced in September’s Programme for Government. This fulfils a policy ask of the CIOT and others that the Scottish Government should work with the Scottish Parliament and external experts to identify a clear mechanism for reviewing and approving changes to devolved tax policy.

These proposals will be consulted on early in the New Year, with a view to taking effect from Budget 2020/2021.

What happens next?

The following timetable has been prepared by the Scottish Parliament setting out the Budget process:

Activity Date Publication of Scottish Budget and associated documentation 12 December Budget Bill introduced to the Scottish Parliament 19 December  Subject Committee Debate on pre-budget reports 24 January Finance and Constitution Committee Stage 1 Report on the Budget published 25 January Budget Bill Stage 1 w/c 28 January Budget Bill Stage 2 w/c 4 February Scottish Rate Resolution w/c 18 February Budget Bill Stage 3 (final stage) w/c 18 February


Because the SNP leads a minority Scottish Government, it needs to secure the support of MSPs from one or more of the other parties in order for its tax and spending plans to pass.

This means that it is possible that certain tax (and spend) measures could be altered during the Budget scrutiny process. Last year, for example, the Finance Secretary had planned to increase the higher rate threshold by inflation but adjusted this to a 1 per cent rise in return for the support of the Scottish Greens.

There has been much in the way of speculation over who Mr Mackay can reach out to in order to secure support for the Budget Bill.

Aside from the SNP’s support for a second independence referendum, the Scottish Conservatives are unlikely to support the Bill because they are opposed to the proposals to diverge Scottish income tax rates from the rest of the UK.

Responding to the Budget statement, the party’s finance spokesperson Murdo Fraser MSP, accused Derek Mackay of ignoring the warnings of business by pressing ahead with income tax changes.

Scottish Labour are also unlikely to offer their support because they have suggested in the past that the Scottish Government’s income tax proposals do not go far enough in increasing income tax bills for the richest.

Their party’s spokesperson, James Kelly MSP, did not focus on alternative tax measures, but instead set out areas of spending where they would like to see extra investment.

The Scottish Greens, who support the idea of independence and have provided the Scottish Government with budget backing in 2016 and 2017, are making life trickier for Derek Mackay with their demands for reform of Council Tax. The lack of specific announcements on local tax reform in the Budget programme (instead, a broad commitment to ending the tax was included) suggest that the two parties remain some way from an agreement.

Patrick Harvie MSP, the party’s co-convener, said there was an “urgent need for local tax reform”.

It has been suggested that the Scottish Liberal Democrats could provide the best route to a deal. In his response to the statement, party leader Willie Rennie asked the Finance Secretary to “put aside independence for now” and support his party’s investment calls.

Despite reports last week that the SNP’s support for a second referendum on independence would stall any formal arrangement, last year’s Budget vote provides an example of what might be possible. Then, the Finance Secretary was able to offer funding for investment in new ferries for the Scottish Islands in return for the support of two Lib Dem MSPs representing island constituencies (the other Lib Dem MSPs voting against the Budget).

In its analysis of the Scottish Government’s proposals, the Scottish Fiscal Commission said that it expected the decision to forego following the UK’s lead in increasing in the higher rate income tax threshold “to start to have an effect on tax residency decisions”.

They said that this was likely to have the greatest impact among people who already split their residency between Scotland and the rest of the UK (although it also considered migration from Scotland).

Commission chair Dame Susan Rice also suggested that it could make people “think twice about coming to Scotland for a job”.

This week’s announcements signal the start of a nearly 10-week process that will culminate with the Budget vote in mid-February. There is still some way to go yet.

Key documents

Scottish Budget 2019-2020 (Scottish Government)

Scotland's Economic and Fiscal Forecasts December 2018 (Scottish Fiscal Commission)