Scottish Budget sets the tone for further income tax divergence from the UK

You can access the relevant budget and tax documents that accompanied today’s statement by clicking on the following link.

For a statement that had been trailed in the press as likely to contain a number of tough tax choices, it lived up to its billing.

Acknowledging the tough choices facing the Scottish Government – and the constraints imposed by the tax system being only partially devolved to the Scottish Government Swinney - standing in for Kate Forbes while she is on maternity leave - set out a package of tax measures that included:

Scottish Income Tax

• Lowering the top rate threshold from £150,000 to £125,140, bringing the threshold into line with the changes announced for the rest of the UK by Jeremy Hunt last month
• Increasing the higher rate of tax from 41p to 42p
• Increasing the top rate from 46p to 47p
• Freezing the remaining thresholds and rates of tax at 2022/23 levels

Land and Buildings Transaction Tax (LBTT)

• Increasing the Additional Dwelling Supplement from 4 per cent to 6 per cent. This measure will be legislated for to take effect from Friday 16 December 2022 to prevent forestalling in the housing market

Scottish Landfill Tax

• Increasing the standard rate of landfill tax to £102.10 per tonne and the lower rate to £3.25 per tonne in 2023‑24, maintaining consistency with UK Landfill Tax increases

Council Tax

• Giving councils the flexibility to set Council Tax rates as they deem appropriate to meet local needs

Non-Domestic Rates

• Freezing the non-domestic (business) rates poundage and offering transitional relief for businesses facing significant increases in rateable values following revaluation in April 2023 revaluation

Initial reaction

The statement got off to a tough start, as the Presiding Officer suspended the sitting to investigate a leak that was made to the BBC about the increases to the higher and top rates of tax.

Once proceedings resumed, John Swinney offered the parliament his ‘categorical assurance’ that he had not authorised the leak of information reported by the BBC. In his speech to MSPs, Swinney said that the government’s decisions over income tax ensure that “people are asked to pay their fair share” in order to create a “fairer society”. He added that the money raised from the decision to increase the higher and top rates of tax by a percentage point would be used to support further investment in the Scottish NHS.

Liz Smith (Scottish Conservative) said that the prospect of a widening tax gap between middle earners in Scotland and the rest of the UK risked the country’s competitiveness, saying it could undermine “the potential for economic growth that this country so desperately needs."

Daniel Johnson (Scottish Labour) said his party supported a progressive approach to taxation but warned that it must be accompanied by “clear improvements to public services”.  Earlier in the week, his party had said that the government had been too timid in its approach to using Scotland’s tax powers and that there was more it could do with the levers at its disposal.

The CIOT issued a reaction in which it pointed out some of the points of divergence between Scotland and the rest of the UK and the implications for taxpayers in 2023/24.

The Institute for Fiscal Studies has also published an initial analysis in which they say the money that will be raised from increasing the higher and top rates and lowering the top rate threshold would cover NHS spending “for only around 48 hours”.

MSPs will return to the Scottish Budget in the early part of 2023 when the Budget Bill is considered by Holyrood. A Scottish Rate Resolution agreeing to the rates and bands of devolved tax for 2023-24 will also be laid in Parliament. It must be agreed by MSPs before the full Budget can be passed into law.