Spring Budget income tax cuts could spell trouble for landlords and Scottish residents

As we approach what is possibly the last chance for the chancellor to win votes before the upcoming general election, many are optimistic that any headroom in the Spring Budget will be used to cut taxes for individuals. Given that National Insurance contributions (NICs) rate cuts were announced in the Autumn Statement, there is the possibility that any new cuts may focus on income tax. 

An income tax cut could be delivered as a reduction to the rate charged or by uplifting the personal allowance and higher rate income tax threshold. The personal allowance and higher rate income tax threshold have been frozen at £12,570 and £50,270, respectively, since 6 April 2021. If these amounts were increased by consumer price inflation, as they would have been prior to being frozen, they would be roughly £15,000 and £60,000, respectively, by April 2024. 

The main UK basic rate of income tax has been 20% since 2008. A reduction to the basic rate of income tax of, say, a percentage point, could be an alternative method for Jeremy Hunt to deliver a tax cut.

Landlords of residential property 

Most unincorporated landlords of residential property are only able to obtain tax relief on finance costs at the basic rate of income tax. Therefore, there will be a significantly different outcome for landlords depending on how an income tax cut is delivered. 

Increasing the higher rate income tax threshold to £60,000 could reduce a landlord’s annual tax bill, by up to almost £2,000 a year, as this would reduce the amount of rental income charged to the higher rate of income tax. Alternatively, a cut in the basic rate of income tax to, say, 19%, may increase tax bills for many landlords as their tax relief on finance costs is reduced once more. I previously wrote about this potential further blow for landlords of residential property.  

Scottish resident taxpayers 

The Scottish government has partially devolved powers over income tax in Scotland; it is able to set its own tax rates and thresholds for Scottish residents. Importantly, however, the Scottish government has no control over the personal allowance or NICs. In the Scottish Budget on 19 December, shortly after the 2023 Autumn Statement in which Jeremy Hunt announced cuts to NICs, the Scottish government increased the additional Scottish income tax rate to 48% and introducing a new ‘advanced’ income tax rate of 45% on earnings between £75,000 to £125,140 from 6 April 2024. 

If the Spring Budget announcements include an extension to the personal allowance or the UK higher rate income tax threshold, then, assuming there is a corresponding change to the NICs thresholds, which currently mirror these UK tax thresholds, the Scottish government may once again need to reassess the Scottish income tax regime. 

Whilst an increased personal allowance will be welcome news to Scottish resident taxpayers, an increased basic rate band could significantly increase the tax burden of those earning more than £50,270 as these individuals would incur both a higher rate of income tax and the primary rate of Class 1 NICs on more of their income. For example, increasing the main UK higher rate threshold to £60,000 would result in Scottish resident employees paying a 52% marginal rate of tax (42% income tax, 10% Class 1 NICs) on employment income earned between £43,662 - £60,000, a whopping 22% more than their English, Welsh and Northern Irish counterparts would pay on the same ‘slice’ of income. 

The potential for further issues for Scottish residents has been noted by Scotland’s deputy first minister, Shona Robison. In a letter to the UK government, she has stated that her ‘firm view is that public spending should be prioritised over tax cuts’ in the upcoming Spring Budget. 

Later in her letter, Miss Robison has noted that the most effective way of addressing the misalignment of Scottish income tax and NICs ‘would be to devolve powers over National Insurance Contributions to the Scottish Parliament. This would allow us to better design a tax system that works more efficiently for people and businesses in Scotland’. 

If an income tax cut is delivered next week, the chancellor will have a choice: he may simply attempt to win votes with a headline-grabbing tax cut or he can seek to address the wider implications of any cut to prevent any unfair outcomes.