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Scottish Budget 2020/21: Tax rates and drama

Amidst Holyrood drama, Donald Drysdale reports on an inconclusive Scottish Budget. The income tax and Land and Buildings Transaction Tax (LBTT) rates were announced but these could be subject to change.

7th Feb 2020
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Thursday’s Scottish Budget was presented to the Scottish parliament in unprecedented circumstances.

For devolution to work smoothly, the Scottish Budget ought to have followed after the UK Budget, which had been set for 6 November 2019 but was postponed until 11 March 2020.

This postponement has created an almost impossible timetable north of the border. By law, Scottish local authorities must set their budgets and council tax rates for 2020/21 by 11 March, while Holyrood must set the Scottish income tax rates and thresholds for 2020/21 by 5 April.

The Scottish Budget was to have been presented by Derek Mackay as finance secretary but, following his surprise resignation on Thursday morning, the task fell instead to Kate Forbes, minister for public finance and digital economy, and ICAEW member.

Although she was given only a few hours advance notice, Forbes presented the Budget clearly and robustly.

Scottish income tax

The partly-devolved power over income tax chargeable on the non-savings, non-dividend income of Scottish taxpayers remains the largest single fiscal lever available to the Scottish parliament.

The distinctive five-band income tax structure implemented in 2018/19 was to have been retained throughout the rest of this parliament, and this plan is being adhered to in 2020/21 – with no change to the existing income tax rates for Scottish residents.

However, the tax bands will become more progressive. The Scottish basic rate and intermediate rate thresholds will be increased – but not (as the Budget suggests) by as much as inflation. The Scottish higher rate and top rate thresholds will be held down at their 2019/20 levels.

Scottish rates and thresholds 2020/21

Band Band name Rate
£12,501* to £14,585 Starter rate 19%
£14,586 to £25,158 Scottish basic rate 20%
£25,159 to £43,430 Intermediate rate 21%
£43,431 to £150,000** Scottish higher rate 41%
Over £150,000** Top rate 46%
Notes:

(1) * Assumes entitlement to UK-wide personal allowance of £12,500.

(2) ** Earnings above £100,000 reduce personal allowance by £1 for every £2 excess.

Income tax divergence

For 2020/21, the Scottish government has assumed, unilaterally, that the UK-wide personal allowance will be £12,500 and the higher rate threshold for the rest of the UK will be £50,000.

It anticipates that Westminster will take no action to create further divergence of income tax between Scotland and the rest of the UK, but that assumption may prove rash. The Scottish government does not know the Chancellor of the Exchequer’s Budget plans, and it recognises that late changes may be required to the Scottish proposals as a result of what is announced on 11 March.

For now, any attempt to quantify potential income tax differentials north and south of the border should be taken with a pinch of salt. Subject to this important caveat, the following table illustrates possible differences at various sample earnings levels.

Scottish vs rest of UK income tax differentials

Earnings in 2020/21 Scottish income tax* Income tax: rest of UK** Excess tax in Scotland
£ 25,000 £2,479 £2,500 -£21
£ 43,430 £6,348 £6,186 £162
£ 50,000 £9,042 £7,500 £1,542
£100,000 £29,542 £27,500 £2,042
£125,000 £44,917 £42,500 £2,417
£250,000 £101,792 £98,125 £3,667
£500,000 £216,792 £210,625 £6,167
Notes:

(1) *Scottish income tax rates and thresholds as announced on 6 February 2020.

(2) ** Rest of UK income tax assumes that rates and thresholds for 2020/21 will be unchanged from 2019/20.

LBTT

The LBTT payable on residential property acquisitions remain at their present levels. The additional dwelling supplement (ADS) will also stay at 4%, but aspects of its operation are being reviewed.

Non‑residential LBTT rates and bands for conveyances will remain unchanged. However, a new 2% band for non‑residential leases with a net present value above £2 million will apply from 7 February 2020, subject to transitional provisions.

LBTT rates and bands 2020/21

Residential property

Non-residential property

Non-residential leases

Purchase price LBTT rate Purchase price LBTT rate Net present value of rent payable LBTT rate
Up to £145,000  0% Up to £150,000 0% Up to £150,000 0%
£145,000 to £250,000*  2% £150,001 to £250,000 1% £150,001 to £2 million 1%
£250,001 to £325,000  5% Over £250,000 5% Over £2 million**  2%**
£325,001 to £750,000 10%        
Over £750,000 12%        
Notes:

(1) * First‑time buyers are entitled to LBTT relief on acquisitions up to £175,000.

(2) ** From 7 February 2020.

(3) ADS at 4% applies to the total price of all relevant residential acquisitions above £40,000, in addition to LBTT.

During 2020/21 the Scottish government will consult on draft legislation to introduce two new LBTT reliefs for property investment funds. These aim to safeguard investment in Scottish real estate and increase the attractiveness of Scotland as an investment destination.

Landfill tax

The rates of Scottish landfill tax (SLfT) are to remain in line with landfill taxes elsewhere in the UK, ostensibly to discourage waste tourism, which begs the question – why was this tax devolved?

Business rates

Non-domestic rates (NDR) ‘poundage’ is to be increased by less than inflation. Several changes to NDR are afoot following the Barclay Review. A key recommendation is to remove charitable rates relief from mainstream independent schools from 1 September 2020.

Air passenger duty

Air departure tax (ADT) was to be replaced air passenger duty (APD) in Scotland, but this has been delayed by concerns about the exemption for the Highlands and Islands. Now the way forward is unclear since a reduced ADT might conflict with Scotland’s ambition to tackle climate change.

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