Scottish Budget – Income tax to stand still, while property tax break set to end

29 Jan 2021

The Scottish Government published its draft Budget for 2021/22 on Thursday, the last before the Scottish Parliament elections take place later this year.

The various publications related to the Budget statement can be accessed from the Scottish Government website: https://www.gov.scot/budget/.

The main tax announcements contained in finance secretary Kate Forbes’ statement were:

Scottish Income Tax

  • Scottish income tax rates are to remain unchanged, with all bands (with the exception of the top rate for income above £150,001) to rise by CPI inflation (0.5 per cent). The top rate is unchanged.

Land and Buildings Transaction Tax

  • The temporary increase to the residential nil-rate band of Land and Buildings Transaction Tax (LBTT)  is to end as planned on 31 March 2021. The Scottish Government has also committed to consult on reform of the Additional Dwelling Supplement (ADS) early in the next parliamentary term.

Scottish Landfill Tax

  • The standard rate of Scottish Landfill Tax will increase to £96.70 per tonne and the lower rate to £3.10 per tonne from 1 April 2021. This is in line with planned inflationary increases to UK landfill tax planned for the coming tax year.

Non-domestic rates

  • The Scottish Government is proposing to reduce the poundage to 49 pence. This would take place midway through the revaluation period. The 100 per cent relief for businesses in the Retail, Hospitality, Leisure and Aviation sectors will continue until at least 30 June 2021.

Council Tax

  • The Scottish Government has proposed a £90 million funding package for local authorities that will compensate them if they choose to freeze Council Tax at 2020/21 levels in the coming year.

Political reaction

The finance secretary said that the Scottish Government’s proposed tax measures would provide ‘the stability and certainty that taxpayers need’, while supporting the country’s ‘recovery and renewal’. She also said that ‘all Scottish taxpayers (will) pay slightly less income tax next year than they will this year, based on their current income’ and that the government’s income tax policy had been ‘a key part of making Scotland an attractive place to live and work.’

In the days leading up to the Budget and during the statement itself, the finance secretary had expressed frustration that the delay to the UK Budget (originally scheduled for November but postponed to 3 March) had limited the government’s ability to plan with ‘certainty’ for the coming year.

The Scottish Conservatives went into Budget week calling on the SNP not to increase taxes, with the party’s leader, Douglas Ross, saying the party would ‘love to reduce the tax burden of the Scottish taxpayer’ over time but was focused now on ‘no further tax rises by the SNP because we want to make sure people have money in their pockets to stimulate the economy.’

The party’s shadow finance spokesperson, Murdo Fraser gave a guarded ‘welcome’ to the government’s income tax proposals, but acknowledged the possibility that they could be subject to further change during negotiations with other parties. He also told the press that the Budget ‘looks like an attempt at a pre-election giveaway’.  Patrick Harvie (Green) said that the Budget had refused to consider progressive taxation and accused Ministers of ‘moving pennies here and there’.

John Mason (SNP) said that he accepted the need for stability in the taxation system but asked for a longer-term view of the Scottish Government’s approach to tax policy. Kate Forbes said that ‘any fiscal consolidation or tax rises’ should be delayed ‘until economic recovery is well underway’ and that the current income tax regime was ‘fair and progressive to begin with’.

What happens next?

Thursday’s statement was only the first stage of a process that is due to conclude early in March. The Finance and Constitution Committee has recommended that stage 1 of the Budget Bill’s scrutiny take place on 25 February, with the second and final stages scheduled to take place after the 3 March UK Budget (on 8 and 9 March respectively).

Based on this timetable, it can be expected that the Scottish Rate Resolution (SRR) – the vote by Parliament to set income tax rates for 2021/22 – would take place either on the afternoon of 8 March or immediately before the Stage 3 Budget vote on 9 March. The SRR has to be agreed before MSPs can vote on the Budget.

Both the SRR and the Budget Bill will require a parliamentary majority to be passed. In the current Scottish Parliament, no one party has an overall majority, so this means that the government will need either the support of at least one other party for its proposals to be passed, or for at least one party to abstain from voting.

The Scottish Greens have been the government’s ‘go-to’ party for Budget support in the 2016-21 Parliament, but Patrick Harvie’s comments on the lack of progressivity in the tax system may be a sign that negotiations with the Greens this year could be more difficult. Last year, the Greens abstained on the SRR vote, but that was sufficient to give the government a majority to pass its proposals. Unless there are any further changes to the tax system, it is difficult to see whether the party would lend its support to this year's tax proposals.

The UK Budget on 3 March will also provide us with an indication of whether the Scottish Government needs to revisit the tax plans published yesterday. The UK Government has already confirmed plans to raise the UK-wide personal allowance and the income tax higher rate threshold by inflation, but any extra changes will not be known until March. It is possible – but unlikely according to media reports – that the chancellor could extend the Stamp Duty Land Tax (SDLT) holiday. If he did, then the Scottish Government may feel it needs to revisit its own LBTT proposal.

Yesterday’s statement was the first stage in a process that still has some time to run. Although unlikely, further changes are still possible.

By Chris Young