Scotland’s minority Scottish National Party (SNP) administration is forced to make changes to its income tax proposals for 2017/18, as Donald Drysdale reports from Holyrood.
Scottish Budget debate
At Holyrood on 2 February 2017, Derek Mackay, Scotland’s finance secretary, introduced a parliamentary debate on the principles of the Budget (Scotland) Bill for 2017/18.
In doing so he stated: “No party in this Parliament has a majority, but the considerable mandate that we were given in the election means that I believe it would not be right to make a fundamental change to the proposals we put to the people of Scotland.
“However, having considered the proposals put to me, I can confirm that this government will lodge a Scottish rate resolution that sets the same tax rates as originally proposed but which applies a cash freeze on the higher rate threshold.”
On the surface, therefore, the Scottish government is aiming to stay with its earlier proposal, contained in its draft Budget of 15 December 2016, to levy income tax on the non-savings, non-dividend income of Scottish taxpayers at the same rates as apply elsewhere in the UK: 20%, 40% and 45%.
However, one important aspect has changed.
Higher rate threshold reduced
The higher rate threshold for taxpayers who are resident outside Scotland will rise from £43,000 to £45,000 on 6 April 2017. Scottish taxpayers had been told on 15 December 2016 that in their case this threshold would increase only in line with inflation – to £43,430. However, this threshold will only apply in respect of their employment income, which increases complexity, as Rebecca Cave explained.
Now Scottish taxpayers are faced with an even worse situation, as the higher rate threshold for 2017/18 will be held at £43,000, and will therefore be cut in real terms. This means that Scots earning above £45,000 will pay £400 more in tax in 2017/18 than their counterparts south of the border. Scottish taxpayers will effectively pay a total of 52% (40% tax plus 12% class 1 NIC) on employment income between £43,000 and £45,000, compared to a marginal rate of 32% (20% plus 12% NIC) payable by taxpayers in the rest of the UK.
This latest change has come about because Scotland’s minority SNP administration accounts for only 63 of the 128 voting MSPs, so it requires backing from at least one other party to gain approval for its tax proposals. Securing this support has not proved an easy task for the SNP, given that its fiscal aspirations differ from those of the other parties – Conservatives (with 31 seats), Labour (23), Greens (6) and Liberal Democrats (5).
In the event, it is the Greens that have come to the rescue, and their more progressive tax ambitions have influenced the new proposals. If the Greens had their own way, they would raise income tax substantially, replacing the existing rates with bands at 18%, 22%, 43% and an additional rate of 60% on incomes above £150,000. Coincidentally they also want to make sweeping changes to council tax, replacing it with a residential property tax at 1% based on property values.
It is probable that a compromise with Labour or the Lib Dems would also have increased income tax. The former want a basic rate of 21% and an additional rate of 50%. The latter want to increase all income tax rates by 1%. At the other extreme the Conservatives align themselves with the Scottish Chambers of Commerce in warning that to create differential income tax rates is “highly dangerous” for the Scottish economy.
In a division at the end of Thursday’s debate, all six Greens supported the government and it was decided by 67 votes to 59 that the Parliament agreed to the general principles of the Budget (Scotland) Bill. But this is far from the end of the story. The debate was simply the end of stage one in the parliamentary process, which considers the general principles of the bill.
There are two further stages, during which the bill may be amended, before it will pass into law. At some stage during the process, the Scottish Parliament must pass a ‘Scottish rate resolution’ to set the income tax rates and thresholds for 2017/18. That resolution must be passed by 5 April 2017 in order to be effective.
In Thursday’s debate, Mackay rejected calls from the Greens to go further on increasing income tax, but under pressure from them he agreed to allocate additional resources of £160m to local government. Significantly, he stated that this was in recognition of the support of the Scottish Green Party for all stages of the Budget bill – together with agreement to allow the Scottish rate resolution to come into force.
Such political manoeuvrings are commonplace where minority governments strive to rule. But they are also non-binding as circumstances change, so they do not dispel uncertainties. The Scottish Government has a lot more work to do before its Budget for 2017/18 is agreed and its new income tax rates and thresholds are set for the coming year. Time will tell.
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.