Scottish Budget confirms further income tax divergence for higher earners

Ministers had trailed the Budget as one of the toughest in the devolution era, driven in part by a UK Autumn Statement which finance secretary Shona Robison said had ‘let Scotland down’, an accusation rejected by UK ministers.

In her statement to MSPs, Robison confirmed a widely speculated proposal to introduce a new ‘Advanced Rate’ of income tax. This is to be charged at 45 per cent and will apply to incomes between £75,000 and £125,140. A more surprising decision was to increase the top rate of tax for the second time in as many years, with the rate increasing to 48 per cent from April.

Other tax measures confirmed in the Budget were:

Scottish Income Tax

• Freezing the starter, basic, intermediate and higher rates of Scottish Income Tax and increasing the starter and basic rate bands of Scottish Income Tax by inflation.

Land and Buildings Transaction Tax (LBTT)

• Freezing LBTT rates and bands and continuing to offer LBTT reliefs for first-time buyers.

Non-Domestic (Business) Rates

• A freeze to the Basic Property Rate, or poundage, which is used to calculate non-domestic rates accompanied by increases in the Intermediate (to 54.5p) and Higher (to 55.9p) Property Rates.
• A continuation of the Small Business Bonus Scheme.
• A 100% business rates relief for businesses located on islands, capped at £110,000 per business, and a retention of other non-domestic rate reliefs.

Scottish Landfill Tax

• Increases to the standard (to £103.70 per tonne) and lower (to £3.30 per tonne) rates of Scottish Landfill Tax, in line with similar increases to UK Landfill Tax.

Council Tax

• Funding to support a Council Tax freeze, in a line with a policy commitment made in October.

The Chartered Institute of Taxation issued a budget reaction in which it set out the practical implications for Scottish taxpayers of the income tax measures announced by the government.

The finance secretary said that the income tax measures proposed by the government would generate £1.5 billion of “additional revenues compared with what we would have if we followed UK Government tax policies.” Robison also defended the decision to increase taxes on higher earners, saying the measures were ‘the right choice’ to support public services, and that they would only impact ‘the highest-earning 5 per cent of taxpayers’.

Robison also lamented the limitations of the Scottish Government’s tax powers, telling MSPs that “the Scottish Government has no say on corporation tax, no powers to mandate the real living wage for all, no ability to consider windfall levies on excess profits, and no options on wealth taxes such as capital gains tax.”

Political reaction

Responding for the Scottish Conservatives, shadow finance secretary Liz Smith said the government’s decision to increase both the income tax burden and the differential with the rest of the UK would send a signal that Scotland was not open for business. Scottish Conservative leader Douglas Ross claimed the combination of tax increases and spending cuts had ‘united Scotland in fury’.

Labour’s Michael Marra said it had been a “chaotic budget from an incompetent government” that will leave ordinary Scots paying more and getting less in return. The Liberal Democrats’ Alex Cole-Hamilton argued that Scotland needed long-term certainty from its tax regime.

Pam Gosal (Conservative) asked what work had been done to measure the impact of behavioural changes arising from increased income tax. The finance secretary said the government would ‘keep a very close eye’ on this while stressing that its approach to income tax policy would mean “[a] majority of taxpayers in Scotland will still pay less tax than they would pay if they lived elsewhere in these islands”.

Economists and business reaction

The Scottish Fiscal Commission (SFC) has estimated that the new 45 per cent rate of income tax and top rate increase to 48 per cent will raise £82 million in 2024-25, with around £118 million lost as a result of changes in taxpayer behaviour. SFC chairman Professor Graeme Roy told journalists that not enough work had been done to consider the long-term behavioural impact of tax divergence, saying it was “a really important question that we’ve never had in the UK before”.

Researchers at the Fraser of Allander Institute at the University of Strathclyde said the finance secretary had been ‘opaque’ and ‘misleading’ to say that the starter and basic rate ‘bands’ would increase by inflation. They pointed out that it was the size of the band, and not the threshold, that had increased, noting that a threshold increase could have been more significant.

The Institute for Fiscal Studies said the income tax increases were ‘small beer in the context of the Budget’ but that they would be ‘more sizeable for those affected by them’, adding that, “[a]t some stage, the Scottish Government will have to look beyond income tax (for example to council tax) if it wants to continue raising revenue from richer Scots.”

Business groups were dismayed by the changes, including the Scottish Chambers of Commerce, who said that the income tax proposals were a ‘blow to Scotland’s attractiveness’ and would ‘impact our ability to attract and retain the talent that business needs’.

The think-tank IPPR Scotland, which had been calling for the Scottish Government to make more extensive use of its tax-raising powers, was critical of the council tax freeze, describing it as ‘ineffectual’ and arguing that the money could have been used to lift 10,000 more children out of poverty.

What happens now?

The Budget Bill will be introduced to parliament, possibly before the Christmas and New Year recess, and scrutiny can expect to begin in the New Year. The Bill will go through three stages of scrutiny, during which time the government and opposition will be able to make and vote on amendments to change its content. Prior to the final (Stage 3) debate on the Bill (which will determine whether or not the Bill becomes law) MSPs will need to agree the Scottish Rate Resolution, the motion agreeing rates and bands of Scottish Income Tax in 2024-25. This has to be endorsed by MSPs before the Budget can become law.

While the Scottish Government’s post-election agreement with the Greens was designed to ensure a parliamentary majority for the Budget, speculation emerged at the start of the week that a group of backbench SNP MSPs may be prepared to rebel against the government.

The report cited up to four MSPs who could speak out against the plans, two short of the number that would be required for the government to lose its parliamentary majority. However, a source within the Scottish Government sought to dampen the speculation, suggesting that the opposition was designed to try to influence the government ahead of Tuesday’s Budget.

Meanwhile, the possibility persists that income tax divergence could further widen early in the New Year, when the UK Spring Budget is predicted to lead to an income tax cut in England.

As the CIOT pointed out in its budget response, both scenarios leave open the possibility that the Scottish Government could have to revisit its tax plans. In this situation, any revisions would need to be agreed before the start of the tax year, as the Scotland Act requires tax rates to be agreed in advance of 6 April. After this point, they cannot be altered until the next financial year.