Scottish income tax goes up again

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Donald Drysdale reports from the Scottish Budget debate at Holyrood and finds that the income tax bands haven’t been nailed down. What will this mean for higher rate taxpayers?

Parliamentary progress

On 25 January the Budget (Scotland) (No 2) Bill was introduced into the Scottish Parliament, but don’t rush for your copy. It’s a document best suited for parliamentarians and economists rather than accountants or the general public.

The Bill seeks parliamentary approval for the public spending and public borrowing implications of the minority SNP administration’s draft Scottish Budget for 2018/19, following scrutiny of the proposals by parliamentary committees.

Political manoeuvrings

SNP currently hold 63 of the 129 seats at Holyrood. The other parties represented there are Conservatives (31 seats), Labour (24), Greens (6) and Liberal Democrats (5). Support from any single party is all that SNP needs to maintain their working majority, and to date, this support has been forthcoming from the Greens.

In the Stage 1 debate on the Bill in the Chamber at Holyrood on 31 January, Scottish Finance Secretary Derek Mackay announced extra spending as part of his deal with the Greens, to secure the political support the minority SNP administration needs to get its Budget through. The price this time has come in the form of additional funding for local authorities, and further loosening of the public sector pay cap. The Greens are also attracted by the Scottish Government’s significant commitment to transitioning to a low-carbon economy.

In December the draft Budget proposed lifting the 1% public sector pay cap to give a 3% rise to NHS staff, police, teachers and others earning up to £30,000. This limit is now to be £36,500, thus raising the proportion of staff groups that receive the inflationary pay increase from 51% to 75% – including nearly 80% of NHS staff and the majority of teachers. Those earning between £36,500 and £80,000 will get rises of 2%.

Additional funds have also been found for ferry services to Shetland and Orkney, attracting support from two Liberal Democrat MSPs.

Scottish rate resolution

Of much greater impact for accountants will be the other piece of the jigsaw – the Scottish tax rate resolution. This must be passed by the Scottish Parliament no later than 5 April 2018 to set the new income tax rates and bands for 2018/19.

The extra spending now announced must be paid for, so Mackay has re-visited his proposals on Scottish income tax thresholds. Amending his earlier Scottish tax proposals for 2018/19, in which he had planned to set the Scottish higher rate threshold at £44,273, he now intends to reduce this to £43,430.

Example 1

Consider the position of Scottish taxpayer Mr A, whose only income is a salary of £47,000 in both 2017/18 and 2018/19:

  • In 2017/18 he paid Scottish income tax of £7,900 – that’s £400 more than the income tax he would have paid if he was in the rest of the UK.
  • Following the Scottish Budget on 14 December, he was expecting to pay £7,785 for 2018/19. This is some £625 more than he would pay if he lived south of the border.
  • Now that the Scottish higher rate threshold is to be held at £43,430, he will pay £7,954 – that’s £169 more than expected and £794 more than down south.
     

Example 2

Ms B is a Scottish taxpayer whose only income is a salary of £60,000 in both 2017/18 and 2018/19:

  • In 2017/18 she paid Scottish income tax of £13,100 – that’s £400 more than the income tax she would have paid if she was in the rest of the UK.
  • Following the Scottish Budget on 14 December, she was expecting to pay £13,115 for 2018/19. This is some £755 more than she would pay if she lived south of the border.
  • Now that the Scottish higher rate threshold is to be held at £43,430, she will pay £13,284 – that’s £169 more than expected and £924 more than down south.

Moving target

Taxpayers and accountants alike should note that the Scottish income tax rates for 2018/19 are not yet fixed. There could be more political skirmishing before the Scottish rate resolution is finally passed, which is likely to happen later this month.

If Mackay’s latest proposals are approved, economic commentators will doubtless be watching with interest. Will Scotland now suffer from higher wage inflation across both public and private sectors, as compared with the rest of the UK?  And will this, combined with its image as a high tax area, encourage or discourage economic growth?

The way ahead

An article in The Economist of 27 January identifies Denis Healey as the last British Chancellor to increase the basic rate of income tax (to 35% for 1975/76) but suggests that opposition to tax rises in the UK is softening. A willingness to pay more tax was also evident at a recent Big Tax Debate in Edinburgh, hosted jointly by ICAS and the CIOT.

If there is indeed a growing appetite to push up tax rates in order to fund better public services, then it seems that Scotland will be the test bed for this – much as it was for the poll tax, with sharp political consequences. Looking ahead, will Scottish voters prove willing to pay more for better public services – or will they resist?

This article was edited on 8 February to correct example 1 and to add example 2 in order to add clarity. These proposed Scottish rates and thresholds can trip-up even the most experienced of tax advisers.

About Donald Drysdale

Image of Donald Drysdale, Author

Donald Drysdale of Taxing Words Ltd is a freelance author and winner of Tax Commentator of the Year in Tolley's Taxation Awards 2017. He also writes for ICAS, Bloomsbury Professional and other publishers, having previously held senior positions in tax and technology at KPMG, PwC and ICAS.

Replies

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By DJKL
01st Feb 2018 18:50

Scottish voters will always be happy for someone, other than themselves, to pay more.

Still, if they keep going long enough re the threshold we will all , in time,be higher rate taxpayers.

Whilst it is currently likely mere grumbling I have met a few individuals who are starting to make sounds that moving south might well become an option, I have even myself been tempted, when browsing on Rightmove for our next (and likely final) house move, to not just look at the Borders but also have a quick scan over what is available for sale in Northumbria.

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By SteveOH
to DJKL
01st Feb 2018 22:17

My brother lives in Ulverston in the Lake District; a beautiful part of the country and not too far from Bonny Scotland :)

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By DJKL
to SteveOH
02nd Feb 2018 13:53

Wrong side for Edinburgh and much more rain, if I was Glasgow based it would be fine as there is decent motorway access.

I suspect I will await retirement when getting to A or B on a regular basis is no longer required, at that point anywhere could work, even Cornwall (more sunshine).

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By RedFive
05th Feb 2018 08:37

Well said DJKL. It appears you have gained Independance by default when no one was looking.

I live just south of the wall, sorry I mean border and have a fair few clients in Edinburgh suburbs.

Not one of them is happy that his English foes, sorry again I mean friends are going to be paying less than them on the same income, despite free prescriptions, university fees et al.

Like Dividend tax most of the general population are too busy watching Eastenders to notice this so it will be a while before it enters the daily conversation.

I’m reinforcing my battlements and refilling the moat in the meantime.

Only joking Northumberland is as everyone knows the real and only Gods country and you are all welcome.

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By dimac
05th Feb 2018 10:46

I hope all those moving South of the border will be happy with paying for prescriptions and the falling standards of public services that I keep hearing complaints about. Not all Scots want others to pay for their services, on the contrary most are willing to pay extra in taxes to look after our less able members of society and unless you live down a rabbit hole you will be acquainted with some of them. I know I am. No one is ever happy paying taxes and we can all pinpoint wastage in the spending of them by government, however the main tax decisions are made at Westminster with only a small amount of leeway devolved. If you want to complain about tax rates then that is the place to start but,no matter how much the government spends on what you consider wasteful, the price of taxation reductions always seems to fall in the areas of greatest public need.

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By DJKL
to dimac
05th Feb 2018 14:35

Would be more than happy to make a payment for prescriptions, even Sweden (that all embracing social democracy) has a charge (think circa first £80 a year)

The fact is the default position for either SNP or Labour re the parts of income tax devolved is to tax us more, they could cut rates but they only think in one direction and we all know (deep inside) it will continue to creep ever upward, tis the nature of the beast.

When you are already paying higher rate tax in Scotland you are paying more than the average and it is interesting how the demographic of who actually loses out pans out; is this the Nats and Labour pandering to their supporters at the expense of others, heaven forbid.

And you do not need to go south for falling standards, our education system is woeful and getting worse, that has developed under the SNP and do not get me started on what (or otherwise) the Scottish Government has actually done for Scottish based business entities:- answer, very little, name me some stunning initiatives in the last say 10 years, there are none, they merely spend our money-badly.

Re the less well of in society, well those better off re income already pay more per £1 earned, what we now have is an even more even more scenario.

Maybe I do not see the attraction, maybe I am not blinded by the Braverheart approach (being both English and Scottish by parents, though Scottish by upbringing) but frankly anyone here who earns more than the average, whose vote really does not matter as there as so few of them, is now going to get bled to appease the baying Nat/Labour supporters; well doubt I will stick around for that, I have three years until 60 at which point, if they keep raising taxes, we possibly head south.

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05th Feb 2018 11:38

The solutions for politicians always seem to involve spending more money and raising more taxes. Efficiency or value for money are dirty words.

Scotland can spend more as it gets a bigger chunk of the income under the Barnett formula and less of the debt payments, but still wants to spend yet more.

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05th Feb 2018 11:51

£13,100 tax on £45,000 of salary? Seems remarkably high, £6,000 higher than I would expect?

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05th Feb 2018 13:00

"The solutions for politicians always seem to involve spending more money and raising more taxes. Efficiency or value for money are dirty words"

Excuse me Ian, but have you heard of Austerity or listened to any governing politician since 2010? I haven't heard one conservative suggesting that spending more money on public services was a good thing in itself - and plenty advocating more efficiency etc.

I am all for value for money and efficiency when spending taxpayers' money. However the NHS, social care, education and other much needed public services can't fund themselves and I would enjoy more honesty from politicians (of any party) about the need for sensible tax increases to fund services and pay public servants properly.

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By DJKL
to el simon
06th Feb 2018 13:04

You do appreciate austerity is just a word, what it means is subjective.

The fact is the spend on the NHS has increased in monetary value during this period of "austerity" just not as much as inflation etc needs.

What politicians and the public all need is a big grown up conversation about what should be provided and what should not;should we be keeping our grandparents alive ad nauseam and despite the cost, is there a cut of point where enough is enough, what is that point, how is it measured etc etc; not an easy conversation, a very emotive question, but frankly a long overdue question.

The facts are really simple, the proportion of the elderly population needing prolonged medical services and care, in proportion to the working population, is increasing, it is likely to continue to increase though at some point there has to be a slowdown in that growth. (the curve flattens)

Accordingly the NHS and social care budgets are going to carry on being squeezed and that burden will fall on a disproportionately smaller tax base, so, choices now arise.

What level of provision, how much is reasonable re taxes, is the UK population onboard (and it is my children rather than myself who face this burden so should be their voice heard ) re this and are they willing to pay the price re unfettered provision? What will that price likely need to be in say 10,20,30,40 years?

The fault to a degree lies with doctors and researchers (if two off my nieces are reading, that means you), we hear that now they can do x, now y, survival rates are now z, in one regard this is really wonderful, from a personal perspective, given my mother died in 1974 from cancer age forty six , I would have loved these advances back then, but is there an age, 75-80-85-90 where medical intervention ought to be curtailed, is so what is it, should mental faculties be taken into account? There are a vast number of hard ethical choices that are needed?

I have read that with increased longevity more and more of us are going to spend our last years with pretty severe dementia, whilst bodies can be kept rolling minds are lagging re such advancement, frankly having used my mind all my working life I can think of nothing worse, so to my mind conversations re assisted dying need addressed sooner rather than later.

It is a similar conversation to state pensions, however give or take we can budget for them they are easier. Allow say 20 years at £8,000, but we cannot do that with social/medical, could be keel over tomorrow, cost nil to state, or 20 years in care with not a clue where I am with a price tag of say £750k.

So, rather than bicker re austerity, we spent 2 billion more than them etc, maybe a mature conversation re what we want and what we are prepared to pay is somewhat overdue.

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By cfield
to DJKL
06th Feb 2018 16:04

This is such a hard-hitting and brutally honest post, it ought to be mandatory reading in political circles. Cuts through all the ideological nonsense and gets to the real heart of the matter. I just wish people in Government would confront the issue head-on as boldly as this.

Way off subject now but happy to continue discussion. It's interesting you mention pensions as I always cite this as a comparator in the NHS debate. Just imagine if we had taxed private pensions the same way as we tax private health insurance. No tax relief for contributions. Employer contributions taxed as a benefit. Private plans would only for the very rich. Everyone else would be totally reliant on the state pension. What a mess we'd be in then. Only those on the extreme left would think that was a good thing.

If employers had been allowed to offer health insurance tax free, perhaps even obliged to, we would by now have a healthy mix of private and NHS health coverage in this country. The pressure on the NHS and the financial burden on the taxpayer would have been so much lower.

That last point may be debatable as privatisation hasn't reduced rail fares, for instance, but I think most would agree that the NHS is inefficient and wastes money hand over foot. The private health sector delivers a far better return on its investment. It gets more bang for less buck.

Standards would be higher too. For instance, dental care would be more like the standards found in France and Germany, not the awful service we have here. Our teeth are an international joke.

The NHS would by now have evolved into the safety net for all that is its real and natural function in a modern society. It would specialise in accident/emergency and premium services like cancer treatment.

The NHS has been prevented from evolving this way by generations of politicians encouraging/forcing us to rely totally on the state. They should have bitten the bullet decades ago and allowed a strong private health sector to emerge, rather than taxing it to death.

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By Mallock
05th Feb 2018 16:00

I know several companies who can't get talent to move to Scotland for fear of higher taxes and the constant threat of Independence. I also have several clients who are actively looking for a move South including one who will be taking a 6 figure tax bill with him: how will that one person's tax be balanced in the budget?
Tax divergence is not a positive move in any way shape or form and I think there is plenty that could be done before divisive tax differentiators are put in place. I would happily pay for my prescriptions and similarly would be happy to pay £5 or £10 to visit the doctor.
Other issues such as removing rates exemptions for private schools is purely pandering to those the SNP see as their core voters. However what will this actually do? What will be the cost to the local authority if a private school has to close and they have to find 1,000 school places? The politics of envy are in full flow here and targeting the better off is sending a message that they aren't wanted in Scotland when the truth of the matter is that everything would collapse without their support.

If this were a UK wide tax policy then people wouldn't consider moving except in exceptional circumstances (like the lunacy of the tax rates in the 1970's which drove many millionaires out the country forever) but the fact is, it is only a 100 mile drive from the Central belt to a part of the UK where the persecution doesn't feel so personal.

I am actually in favour of higher taxes but only if everyone's paying them. Auto-enrolment increases are coming this year, on top of tax increases which will inevitably lead to upward pressure on wages making Scotland a less attractive option for business than the rest of the UK.

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05th Feb 2018 16:30

I completely agree with the comments above from DJKL and Mallock. This is a political maneuver to appease the majority of SNP voters who are unaffected by these changes rather than supporting the true lifeblood of Scotland, the businesses and business owners! Worrying times.

I know that we are having to pay more taxes in Scotland but £13,100 of income tax on £45k of employment income? I think Donald needs to try again. ;-)

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By cfield
05th Feb 2018 19:45

If Labour wins the next election and puts tax rates up to the levels proposed in their last manifesto, Scotland could briefly become a tax haven until the SNP follow suit.

Of course, there is always the Isle of Man or Dublin. Depends how mobile you are.

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05th Feb 2018 22:06

Generally agree with previous comments but just one other observation re efficiency. I worked in oil industry where assets are sweated. Child wanted to study neuroscience at uni so arranged a meeting with MRI team at uni. Whist child talking to radiographers I talked in back of room with physicist/engineer and said so how much does this kit cost: upwards of £1million. So you have 3 teams a day running this to fully utilise it? Eyes roll to ceiling - no. Why not? Unions. In the oil industry it would be used 24 hrs/day bar maintenance. I guess in any private company it would. Now its only one case but ....

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06th Feb 2018 15:25

http://www.gov.scot/Resource/0053/00530863.pdf
The below is on page 2 of web link , sorry table would not format properly.

The table below compares the change in take-home pay for individuals earning different levels of income. Three different comparisons are provided.

• The first shows the impact of Scottish Government changes to rates and bands only

• The second shows the impact of Scottish Government changes to rates and bands combined with inflationary changes to thresholds and the personal allowance coming into effect next year. This demonstrates the impact of all income tax changes introduced in 2018-19 compared to 2017-18.

• The third set out the difference in income tax paid when compared to the rest of the UK.

Example Impact of SG Impact of SG Impact
Incomes changes to rates changes to relative
and bands rates and to rest
bands and of the
inflationary UK
Changes to
the thresholds
£15,000 £20 £90 £20
£20,000 £20 £90 £20
£26,000 £0 £70 £0
£33,000 -£70 £0 -£70
£35,000 -£90 -£20 -£90
£40,000 -£140 -£70 -£140
£50,000 -£409 -£84 -£824
£60,000 -£509 -£184 -£924
£75,000 -£659 -£334 -£1,074
£100,000 -£909 -£584 -£1,324
£120,000 -£1,209 -£884 -£1,624
£150,000 -£1,527 -£1,343 -£1,943

Impact on Households: Further information on the distributional impact of the Scottish Government’s income tax changes will be provided in due course.

-------------------------------------------
Scotland
PAYE tax rates and thresholds 2018 to 2019

Employee personal allowance £228 per week
£988 per month
£11,850 per year

Scottish starter tax rate 19% on annual earnings
above the PAYE tax
threshold and up to
£2,000

Scottish basic tax rate 20% on annual earnings
from £2,001 to £12,150

Scottish intermediate tax rate 21% on annual earnings
from £12,151 to £32,423

Scottish higher tax rate 41% on annual
earnings from £32,424
to £150,000

Scottish top tax rate 46% on annual earnings
above £150,000

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By Mallock
to sarah douglas
06th Feb 2018 15:29

And the issue with this is that it is seen as the small end of the wedge and those who think like this will move.

I heard today of a business which has one office in Scotland and one in England and they are now actively looking to close the Scottish operation and move to England, setting up a second English office. This is solely due to the direction of the tax changes and the political climate. Again, there may not be many people involved but there are multiples of 6 figures in tax heading out of the Scottish Government straight into the hands of Westminster.

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07th Feb 2018 13:27

A point that is not often mentioned is that our national saving rate is low so around 98% of increased income gets spent in the wider economy contributing to incremental business activity, VAT, income tax etc etc.

This works in reverse also, so increasing tax or non giving allowances takes away funds.

This is also part of the point with the Living Wage, many expected unemployment to rise as workers were priced out of jobs, when infact the opposite happened, wages increased and so did the general level of economic activity.

I think this is a regressive step by Scotland and will be unpopular. Reducing taxation levels isn't the one way street of lower Government income it is usually portrayed as.

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08th Feb 2018 17:15

Paying more tax doesn't imply nor guarantee better public services as evidenced in the discussion above. All that the tax is doing is guaranteeing better pay for public servants. This may be a good thing in itself, but I can't see the difference between a 1%, 2% or 3% pay rise ( gross, before tax and NI ) making any difference to the quality of the services provided. However it's not my problem, I live in England.

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08th Feb 2018 17:15

Paying more tax doesn't imply nor guarantee better public services as evidenced in the discussion above. All that the tax is doing is guaranteeing better pay for public servants. This may be a good thing in itself, but I can't see the difference between a 1%, 2% or 3% pay rise ( gross, before tax and NI ) making any difference to the quality of the services provided. However it's not my problem, I live in England.

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