Increased Income Tax powers means different rates in Scotland to the rest of the UK.
As Scottish devolution moves from philosophy to practicality, the draft budget proposed on 15th December by Derek Mackay, contains one of the biggest ‘firsts’ for the Scottish parliament – the potential to set different income tax rates and thresholds to those established by Westminster. This has repercussions for all UK taxpayers, not just Scottish citizens.
Achieving Royal Assent at Westminster for the Scotland Act 2016 has really clarified the government’s decision to really fulfill the Smith Commission Agreement. As of the 2017/18 tax year, the Scottish parliament has more and broader powers to change income tax thresholds and rates. It is important to note that this does not apply to income earned from savings or dividends. It still has the full scope of incomes from property rental, pensions, self-employment, other employment and the majority of trusts.
What changes are being proposed?
In his draft budget, Mackay proposes to freeze Basic Rate income tax at 20%, Higher Rate at 40% and Additional Rate at 45%.
This is in spite of some people’s desire to increase the Additional Rate to 50%. It was argued that Scottish taxpayers in this bracket could easily move to another part of the UK or incorporate their business to avoid the increase, thus losing their revenue completely.
The Scottish Higher Rate threshold will go up by £430 (linked to RPI), while Philip Hammond is putting everyone else’s up by £2,000. Not the middle class protection Mackay claims the budget proposals to be. Looking to the future, the Scottish proposal suggests that the Higher Rate threshold will only go up by the rate of inflation for the rest of this parliamentary term. Hammond has declared that he wants the Higher Rate to reach £50,000 by 2020 – a stark difference.
As the Personal Allowance is going up by £500, the Basic Rate band will be £70 lower.
What cannot change?
National Insurance Contributions, Capital Gains Tax, Savings income and earnings from dividends all remain under Westminster’s control and will stay the same across the UK.
What difference does it make?
Any change to the tax system brings added complications, particularly for Scottish taxpayers who will have to work out two separate tax calculations every year. Thankfully, HMRC have added a ‘Technical Note’ (November 30th 2016) to explain how the Scottish and UK systems fit together, rather than a legal change.
For Scottish citizens, they will know that there will be no imminent Income Tax rise, but will not benefit from the income tax benefits available to the rest of the UK.
This is not yet set in stone. Holyrood must pass a Scottish rate resolution by 5th April 2017. They will hold one vote on income tax rates and thresholds, and another vote on the overall budget. In the meantime, it is up to the SNP to garner enough support to pass their breakthrough budget.
