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Scottish Budget 2021/22 helps the lower paid

The Scottish government has set a Budget for 2021/22 that provides a marginal benefit to the lower paid, and taxes higher earning residents slightly more than if they lived in the rest of the UK.  

29th Jan 2021
Tax Writer Taxwriter Ltd
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The Scottish Parliament
istock_Scottish-parliament_Daniel-Tomlinson

At a time when the relationship between the UK and Scottish governments is at an all-time low, it was churlish for the Prime Minister to overshadow what should have been a big day for the Scottish Parliament: the presentation of the 2021/22 Budget on 28 January 2021.

On the same day the Prime Minister decided to visit Scotland and push his message that the United Kingdom was better together, with an eye on the Scottish Parliamentary elections to be held on 6 May 2021. 

Timing

For devolution to work smoothly the Scottish Budget needs to follow after the UK Budget. This timetable allows Holyrood to know how much funding it will receive from UK-wide taxes such as VAT, NIC and corporation tax, before it set the levels of income tax, landfill tax and LBTT, which need to be in place before April 2021.

However, in the back to front world we live in Scotland’s full financial picture won’t be known until Chancellor Sunak presents his Budget on 3 March, so there may have to be further changes to the Scottish tax rates or thresholds before the new tax year starts. 

Scottish income tax

Holyrood can only set income tax rates and thresholds in relation to the employment income, pensions and property income of Scottish taxpayers. Savings and dividend income, plus capital gains are all taxed at rates set by the UK government, which also sets the NIC rates and thresholds.

This leads to some very odd marginal tax rates, and challenging tax computations for taxpayers with an unusual mix of income sources.    

Scottish rates and thresholds 2021/22

Band Band name Rate
£12,571* to £14,667 Starter rate 19%
£14,668 to £25,296 Scottish basic rate 20%
£25,297 to £43,662 Intermediate rate 21%
£43,663 to £150,000** Scottish higher rate 41%
Over £150,000** Top rate 46%
 

*  Assumes entitlement to UK-wide personal allowance of £12,570.

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

Income tax divergence

The UK government has already indicated that it will increase the UK-wide personal allowance to £12,570 and the higher rate threshold for the rest of the UK will be £50,270, as set out in Tax and NIC thresholds for 2021/22.

The CIOT has calculated that Scottish taxpayers with income of more than £27,393 will pay more income tax than those resident in the rest of the UK because of the higher rates of Scottish income tax that will apply to income above this level. This is a result of the Scottish income tax lower rate of 19% that applies of the first £2,097 of taxable income. This will represent a saving of approximately £21.

Scottish taxpayers with employment income that falls between the Scottish and UK higher rate thresholds will pay a marginal rate of tax of 53% (income tax and NIC) on this portion of their income.

Employee in Scotland in 2021/22
Income in band

£

Scottish tax

%

NIC

%

Total rate on band

 %

0 – 9,568 0 0 0
9,569 – 12,570 0 12 12
12,571 – 14,667 19 12 31
14,668 – 25,296 20 12 32
25,297 – 43,662 21 12 33
43,663 – 50,270 41 12 53
50,271 – 100,000 41 2 43
100,001 – 125,140 61.5 2 63.5
125,141 – 150,000 41 2 43
Over 150,000 46 2 48

LBTT

The rates and bands of land and buildings transaction tax (LBTT) will remain unchanged in 2021/22, and the LBTT temporary ‘holiday’ for purchases of residential property will end on 31 March 2021 as planned. LBTT

The additional dwelling supplement (ADS) will also stay at 4%, and the Scottish government will consult on reforms to ADS early in the next Parliament.

Purchase price of residential property Regular main rates
%
Temporary 

Main rates

%

ADS

%

Sales completed in: 1 April 2015 to 14 July 2020 and from 1 April 2021 15 July 2020 to 31 March 2021 From 25 January 2019
Up to £145,000* 0 0 4
£145,001–£250,000* 2 0 4
£250,001–£325,000 5 5 4
£325,001–£750,000 10 10 4
Over £750,000 12 12 4

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

Landfill tax

The rates of Scottish landfill tax will remain in line with landfill taxes elsewhere in the UK. This is presumably to discourage waste tourism, but it undermines the freedom of Holyrood to set differential rates.

Business rates

Non-domestic rates (NDR) ‘poundage’ will be cut to 49p from April 2021, which will apparently be the lowest non-business rate anywhere in the UK.

The Scottish government has also committed to extending the 100% business rate relief for retail, hospitality and leisure businesses for three months to 30 June 2021, which will be funded from the money reimbursed by supermarkets and other retailers.

The UK government has not made an equivalent promise to businesses in England, but perhaps Sunak will follow Scotland’s lead on 3 March. 

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