New tax powers for Scotland - but will they be used?

23 March 2016

Shirley McIntosh

The Scotland Bill is in the finishing straight – approved by the Scottish Parliament, passed in its final reading in the House of Lords and now only the final Commons review to be held on the afternoon of 23 March. The Scotland Act 2016 may be on the statute book by the Scottish elections on 5 May.

Getting to this stage has been a tortuous process. Agreeing a fiscal framework to underpin the Act took months of negotiation and at one point threatened to derail the Bill altogether.

So the next Scottish Parliament will have the long awaited devolved powers over income tax rates and rate bands. Much has been written about the state of the Scottish finances and the need for the next Scottish government to raise more cash. Tax increases were widely expected, and we have now heard from the First Minister, Nicola Sturgeon, what the SNP would do, should they (again as widely expected) be re-elected, with the devolved tax powers over income tax.

The answer – nothing…

Income tax rates and bands are to be frozen for 2017/18 and the increase in the 40 per cent band announced by George Osborne will not be implemented in Scotland.

The basic rate of tax at 20 per cent will not be increased during the life of the next parliament, although there is the suggestion of some form of nil rate band to increase the personal allowance above the UK level by 2020.

There is also to be no increase in the additional rate of 45 per cent for 2017/18, although that commitment will be reviewed annually thereafter.

Ms Sturgeon has stated that 'No taxpayer will see their bill increase as a result of these Scottish government proposals.' However, by not implementing the uplift in the 40 per cent band to £45,000, Scottish taxpayers with incomes between £43,387 and £45,000 will pay up to £323 more in tax than their counterparts in the rest of the UK.

The SNP announcement also acknowledges that Scotland having higher rates of tax than the rest of the UK could lead to some higher earners leaving the country. It therefore begs the question how much benefit the Scottish government will gain by its powers over tax rates and bands.

Property has been a source of tax revenues both north and south of the border in recent years and with promised reviews in Scotland of both council tax and business rates, it seems that the focus of Scottish tax raising will move to the property base. Will we see Mr Osborne’s changes in SDLT for commercial property being replicated in Scotland?

Next move Mr Swinney.

For more information please contact Shirley McIntosh, or your usual RSM contact.

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