MSPs agree Scottish income tax plans for the coming year

The Scottish Rate Resolution (SRR) is the process by which MSPs agree to set rates and bands of Scottish Income Tax (that is, income tax that is charged on non-savings, non-dividend income) for the coming financial year. The SRR forms part of the wider budget process and must be agreed by Holyrood before the final vote to set the Scottish Budget has taken place.

Because the cooperation agreement between the Scottish Government and Scottish Greens ensures a parliamentary majority for measures including the Budget, the resolution’s passage was guaranteed before the vote took place. Opposition MSPs signalled they would not oppose the measures, but used their contributions to outline how they would use Holyrood’s tax raising powers.

MSPs were asked to agree to the Scottish Government’s income tax policy for 2022/23, that was first outlined in the draft Scottish Budget statement of 9 December. The government proposed to:

• Freeze all rates of Scottish Income Tax (the starter (19p), basic (20p), intermediate (21p), higher (41p) and top (46p) rates)
• Increase the starter and basic rate thresholds by inflation
• Freeze the higher and top rate thresholds

You can read more detail about what these changes mean for Scottish taxpayers on our blog, Scottish income tax rates and thresholds for 2022/23 – what do they mean for Scottish taxpayers?

The debate

Tom Arthur, the Minister for Public Finance, told MSPs that “certainty and stability” was needed in the tax system as the country recovers from the pandemic and deals with the rising cost of living. He said that this was why ministers had decided to freeze income tax rates and to increase the starter and basic rate bands by inflation.

By freezing the higher and top rate thresholds, Arthur cited forecasts from the Scottish Fiscal Commission that this would raise an additional £106 million in revenue to support public services. In written responses to questions from Kenneth Gibson (SNP), chair of the Finance and Public Administration Committee, two weeks’ ago, Arthur confirmed that the Scottish Government expected there to be an additional 36,300 higher and top rate taxpayers in the coming tax year in 2022-23 compared with 2021-22.

He also stressed that the Scottish Government’s approach to tax would continue to ensure that “the majority of Scottish taxpayers will pay less income tax than they would elsewhere in the UK”.

Liz Smith, the Scottish Conservatives’ finance spokesperson, said her party were “very pleased” that rates would be unchanged, but warned that adjusting income tax bands would lead to “68,000 people paying more tax”.

Smith also warned of the “deeply worrying” projections from the Scottish Fiscal Commission that economic underperformance and increasing demands on social security would lead to a “downward impact” on income tax receipts. This was a theme common in the Finance and Public Administration Committee’s report on the Scottish Budget, published last month.

Scottish Labour’s finance spokesperson, Daniel Johnson, lamented the lack of participation from MSPs in the tax debate. He said he believed that “matters of taxation are hugely important and we need more discussion…rather than less”.

Johnson said that Labour backed the government’s broad approach to increasing the progressivity of the tax system, but accused ministers of not going far enough.

He agreed that ministers were “correct to leave the rates fundamentally unchanged and to raise the thresholds in line with inflation” but argued that claims of progressivity were “marginal”. He said: “If we look at the impact, we find that those who earn under £25,000 will pay just 65p less tax in 2022-23 than they paid in the previous year, whereas those who earn £25,000 or more will pay £4.57 less. That is not a progressive impact”. Johnson also said he believed the level of income at which Scots will start to pay more income tax relative to the rest of the UK  next year (£27,850) to be “incredibly low”, implying again that the progressivity of the devolved tax system was not as strong as ministers suggest.

Scottish Liberal Democrat leader Alex Cole-Hamilton agreed that stability within the tax system was important at this time. He said his party would not propose substantial changes to the rates and bands of Scottish income tax but that over the parliamentary session, “there should be appropriate and affordable indexation of the thresholds”.

Michelle Thomson (SNP) spoke in favour of increased tax devolution, citing comments made by Paul Johnson of the Institute for Fiscal Studies last December that “There is no reason in principle why a slew of other taxes shouldn’t eventually be devolved”.

Scottish Green MSP Ross Greer told his colleagues that “I quite like talking about taxation policy”. But he also expressed frustration at the limited time taken by MSPs to scrutinise tax measures and the poor quality of public debate.

Asked by Liz Smith whether he would support a Scottish equivalent of the UK Finance Bill, Greer said the proposal was “interesting” and merited further consideration.

In closing remarks, Paul Sweeney (Labour) reiterated his party’s concerns with the overall progressivity of the devolved income tax system and Douglas Lumsden (Conservative) made criticisms of the Scottish Government’s overall approach to income tax policy and the economy.

Tom Arthur, summing up for the government, stressed the need for a “mature” debate on tax in Scotland and welcomed the overall tone of the contributions that had been made.

MSPs agreed to the Scottish Rate Resolutions by a margin of 89-0, with 29 abstentions from the Scottish Conservatives. The vote means that Scottish Income Tax can be collected in the 2022-23 tax year and that MSPs can conclude consideration of the Budget Bill next Thursday.

You can read the full transcript of the debate here.

Chris Young, CIOT External Relations team.