More than two thirds of Scottish income taxpayers will pay less tax in the new tax year on their current income, although top earners will face higher tax bills and an intermediate rate will increase tax rates by 1% for those earning over £24,000 as the Scottish parliament plans to vote through a series of progressive tax measures
Following a final debate on the measures in the Scottish parliament, finance secretary Derek Mackay confirmed that the tax bands will come into force for the 2018/19 tax year. MSPs passed the vote in favour of the tax changes by 67 votes to 50 at the Scottish Budget debate on 22 February.
The changes will see Scotland introduce several new tax bands from 6 April with middle income earners set to pay an extra 1% in tax, with an intermediate rate of 21% introduced for the first time while top earners will also be hit.
Mackay said the new starter rate of income tax for Scottish taxpayers, combined with an increase in the personal allowance, will result in 70% of all income taxpayers paying less tax than they do this year on current incomes and raise additional revenue to support vital public services and investment in the economy.
The Scottish government’s use of the devolved income tax powers will ensure an additional £428m in 2018/19 to support a budget that:
- will protect public services that are free at the point of use, including free prescriptions, free personal care and free tuition;
- will increase the health budget by £400m; and
- will provide above-inflation investment in the police, in universities and colleges and in local government services.
The main tax measure will see the introduction of an intermediate rate for the first time in Scotland, kicking in for earners over £24,000 up to £43,450, creating a 21% tax band.
The higher rate will also increase to 41% for those earning £43,450 to £150,000, while the top rate goes up 1% to 46% for anyone earning over £150,000. Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over £100,000.
The Scottish government has estimated that nearly two thirds (64%) of current basic rate taxpayers will pay less in Scotland than they will elsewhere in the UK in 2018-19.
Scottish income tax proposed rates and bands 2018-19
Scottish income tax rates | Rate | Scottish bands |
Starter rate | 19% | Over £11,850 - £13,850 |
Scottish basic rate | 20% | Over £13,850 - £24,000 |
Intermediate rate | 21% | Over £24,000 - £43,430 |
Higher rate | 41% | Over £43,430 - £150,000 |
Top rate | 46% | Above £150,000 |
Source: Scottish Government
Finance secretary Derek Mackay said: ‘The Scottish government has faced continued austerity from the UK government. Over a 10-year period, Scotland’s block grant will have been cut by £2.6bn in real terms and we face a £500m real terms reduction in spending on day-to-day services over the next two years.
‘Our progressive approach to reforming income tax will deliver greater tax fairness and protect the lowest earning taxpayers in Scotland. By using our devolved income tax powers we will ensure we have an additional £428m next year to support a Budget that will help mitigate UK budget cuts, protect our NHS and other public services, support our economy and tackle inequality in our society.’
The Scottish Fiscal Commission estimate the policy will raise an additional £219m, taking forecast income tax revenues in 2018-19 to £12,177m.
The truncated period between now and the new tax year on 6 April 2018 leaves little time for taxpayers, employers and practitioners to prepare for the changes.
Moira Kelly, chair of the CIOT Scottish Technical Committee, warned: ‘Today is a historic day in Scotland’s devolved tax journey, but the price to pay for exercising these powers will be increased complexity for almost all Scottish taxpayers.
‘With less than six weeks to go until the start of the new tax year, there are a range of issues that require amendments to UK legislation to deal with issues such as determining eligibility for marriage allowance and ensuring that the appropriate amount of tax relief is calculated for pension contributions and gift aid contributions.
‘This is particularly pressing in respect of pensions, where the new starter and intermediate rates of tax may mean that increasing numbers of Scots may have to enter self-assessment in order to ensure that they not only obtain the appropriate amount of tax relief, but understand clearly their tax position.
‘While it is unlikely we will see such significant and substantive changes every year, the current Scottish budget process does not lend itself well to ensuring adequate scrutiny of devolved tax legislation. An annual Scottish Finance Bill would go some way towards addressing some of the issues encountered in this year’s budget process.’
Following the Scottish government’s decision in 2017-18 to freeze the higher rate threshold of income tax and the introduction of reformed income tax proposals for 2018-19, income tax policy in Scotland contributes to forecast revenues £428m above the block grant adjustment to support public spending and investment in the economy in 2018-19.
Income tax Policy proposals in Draft Budget 2018-19: Fact Sheet
Report by Sara White