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?
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.
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.
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.
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.
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
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.