Scottish tax gets progressive

15 December 2017

In a much anticipated Scottish Budget on 14 December, Scottish Finance Minister Derek Mackay heralded a more progressive income tax regime in Scotland compared with the rest of the UK.

Assuming the budget proposals obtain the approval of the Scottish Parliament, from April 2018 Scottish taxpayers will have their non-savings and non-dividend income subject to tax over five rate bands – two more than the rest of the UK and at different rates.

The 19 per cent, 20 per cent and 21 per cent bands are designed to reduce the tax liabilities for those earning less than £26,000 when compared with contemporaries in the rest of the UK. Those earning up to £33,000, representing 70 per cent of Scottish taxpayers, are expected to pay no more tax next year than they do presently.

The higher rate threshold will increase by inflation to £44,273 - £2,077 less than in the rest of the UK. Above this level, the tax rate is increased from 40 per cent to 41 per cent and for additional rate taxpayers with income over £150,000 there is another 1 per cent increase in rate to 46 per cent.

A Scottish taxpayer earning £100,000 will pay approximately £1,150 more in tax than an equivalent taxpayer south of the border. At earnings of £200,000, the figure is almost £2,275.

Those paying tax at the higher and additional rate of tax account for nearly 60 per cent of all income tax paid in Scotland while representing less than 10 per cent of the adult population and are therefore significant to tax revenues.

Concerns that a 50 per cent top rate would be introduced were abated when the Scottish Government's Chief Economic Adviser published a report two days before the budget suggesting that such a high rate would encourage taxpayer behaviour that would actually reduce the amount of income tax raised in Scotland.

Those higher earners who own their own business are able to choose whether to take salary or dividends from their company. Many already benefit from the highest dividend rate of 38.1 per cent compared with additional rate tax of 45 per cent. However, switching from salary to dividend would have a higher impact in Scotland since the tax raised from dividends is reserved to Westminster and would not be paid to the Scottish Government.

There was more bad news for those whose children attend private schools. From April 2020, business rates relief for schools with charitable status will be withdrawn which is likely to have a big impact on fee levels.

However, there was a small crumb for first time house buyers as Land and Buildings Transactions Tax at the zero rate is extended from £145,000 to £175,000. The £600 saving might just cover the legal fees!

The UK already has one of the most complex tax codes in the world and Scottish taxpayers are now faced with an even more bewildering set of calculations to work out how much to pay. HMRC's systems are already struggling to cope and this extra pressure does not bode well for the introduction of Making Tax Digital.

The Office of Tax Simplification must be tearing its hair out.