Produced by Tolley in association with Andrew Ford of Barr & Ford Limited

This news item is a summary of the tax changes set out in the Draft Scottish Budget 2018/19 presented to Holyrood by the Cabinet Secretary for Finance, Derek Mackay, on Thursday 14 December 2017. The Budget will remain draft until it is voted upon and approved by the Scottish Parliament. The timetable for scrutiny of the draft budget has yet to be published.

Highlights from the budget statement include:

  • there will be five income tax bands from 2018/19 onwards, which apply to the non-savings income of Scottish taxpayers (savings and dividend income remains taxable at the UK rates and bands)
  • the income tax higher rate threshold will be £44,273 in 2018/19 (compared to the UK higher rate threshold of £46,350)
  • a new land and buildings transaction tax (LBTT) nil rate for first-time buyers
  • the rates of Scottish landfill tax will increase by RPI to keep these rates in line with landfill tax charges in the rest of the UK

    *the introduction of air departure tax (originally expected to be devolved with effect from 1 April 2018) continues to be deferred

Income tax

The Scottish Government has the power to vary the basic rate, higher rate and additional rate of income tax for non-savings income. It can also create new tax bands. It does not have the power to set the level of the personal allowance, set different rates for different types of non-savings income (eg different rates which apply to property income only, say), or alter / create / abolish income tax reliefs. These remain reserved by the UK Government.

In the build up to the Budget, the Scottish Government published a discussion paper that included analysis of four different potential income tax regimes (based on three, four, five and six tax bands), together with forecasts of the increase or decrease in income tax revenues based on behavioural responses to the changes. Although the changes were expected to increase the tax collected, they were expected to the complexity of the income tax system.

The changes announced in the Draft Scottish Budget 2018/19 increase the higher rate and additional rate of income tax by 1% each and split the basic rate band into three bands, giving a total of five tax bands in 2018/19 (up from three tax bands in 2017/18). The additional rate has been renamed the ‘top rate’ in Scotland.

The tax rates below apply to the taxable non-savings income of Scottish taxpayers after deduction of the personal allowance (£11,850 in 2018/19):

Name of the tax band Tax band Tax rate
Starter rate £1–£2,000 19%
Basic rate £2,001–£12,150 20%
Intermediate rate £12,151–£32,423 21%
Higher rate £32,424–£150,000 41%
Top rate £150,000+ 46%

Draft Scottish Budget 2018/19, page 21

This means the Scottish higher rate threshold is £44,273 in 2018/19 (personal allowance of £11,850 plus intermediate rate band of £32,423), compared with the higher rate threshold in the rest of the UK of £46,350.

The Scottish Government’s calculations indicate that once the personal allowance is taken into account, only individuals with income over £33,000 will be paying more tax than they did in 2017/18. This means that 30% of Scottish taxpayers will pay more income tax in 2018/19 on their income.
Draft Scottish Budget 2018/19, page 22

According to the Scottish Fiscal Commission, these changes are expected to increase income tax revenues by £164m.
Draft Scottish Budget 2018/19, page 22

These changes were not subject to formal consultation and are not without controversy. The Scottish National Party Manifesto 2016 (page 9) promised to retain the three income tax bands, freeze the basic rate of income tax and only raise the higher rate threshold by inflation until 2021/22.
Discussion paper (Nov 2017), page 19

As was the case in 2017/18, there remain a number of mismatches for Scottish taxpayers in relation to the differences between the higher rate threshold in Scotland and the rest of the UK in 2018/19, as shown in the table below:

MismatchCommentary
Class 1 and Class 4 national insurance contributions The upper earnings limit for Class 1 and the upper profits limit for Class 4 are aligned with the higher rate threshold which applies in the rest of the UK.

Therefore, employed Scottish taxpayers will face a marginal rate of 53% on earnings between £44,274 and £46,350 (Scottish higher rate of 41% plus Class 1 primary rate of 12%).

The marginal rate for the self-employed at this profits level will be 50% (Scottish higher rate of 41% plus Class 4 main rate of 9%)
Savings income and dividend income The income tax rates and thresholds for the savings and dividend income of Scottish taxpayers are the same as for taxpayers in the rest of the UK. This means the starting rate for savings, savings nil rate band and dividend nil rate band should be considered for Scottish taxpayers. It also means that Scottish taxpayers may be higher rate taxpayers for non-savings income but basic rate taxpayers for savings income
Rates of capital gains tax The rate of capital gains tax depends on the remaining basic rate band for income tax. As capital gains tax is reserved, the higher rate threshold for capital gains tax for Scottish taxpayers remains aligned with the higher rate threshold for the rest of the UK. Therefore it is possible to be a higher rate taxpayer in Scotland but have remaining basic rate band for the purposes of capital gains tax

However, the addition of new tax bands and the differences in rates adds further complexity and increases the number of Scottish taxpayers who will need to file Tax Returns:

IssueCommentary
Contributions to personal pension schemes These amounts are deemed to be paid net of 20% basic rate tax (whether or not the taxpayer has paid sufficient income tax to cover this amount), with tax relief given to higher rate and additional rate taxpayers via the extension of the basic rate and higher rate bands.

As the Scottish basic rate remains 20%, the relief at source rules should not be affected. However, for those paying tax at a rate above 20%, the relevant tax bands (potentially the intermediate rate, higher rate and top rate bands) need to be extended by the value of the gross contribution. This means that taxpayers earning over £24,000 (personal allowance £11,850 plus basic rate band £12,150) may need to file a Tax Return to claim relief. Note that the starter rate is not extended as the rate is lower than the Scottish basic rate.
FA 2004, s 192(4A)

The UK basic rate, dividend ordinary rate, higher rate and dividend upper rate bands may also need to be extended if the Scottish taxpayer has any taxable savings income and dividend income
Donations to charity under gift aid Currently these amounts are deemed to be paid net of 20% basic rate tax, with tax relief given to higher rate and additional rate taxpayers via the extension of the basic rate and higher rate bands.

Where the taxpayer has not paid sufficient tax to cover the relief at source, this is collected via a tax charge under the Self Assessment regime. Anyone paying tax at the starter rate of 19% who gives money to charity may find themselves with a need to complete a Tax Return to pay over the difference.

Also, as with personal pension contributions above, anyone paying tax at a rate above 20% will need to extend the relevant tax bands as necessary to obtain relief, increasing the number of people who need to complete a Tax Return.
ITA 2007, s 414(2)
PAYE settlement agreements (PSA) Where Scottish taxpayers are included in the employer PSA from 2018/19 onwards, the employer will need to consider the marginal rate of these individuals more carefully to ensure the amount of the benefit is grossed up correctly
Bonus v dividend comparative calculations It will be necessary to factor in these rates when preparing comparisons between bonus and dividends for Scottish taxpayers for 2018/19. Where personal pension contributions are factored in, these calculations may be more complicated (see above)

The limited exemption for childcare vouchers is not affected, as the amount of the voucher available to those who joined the employer scheme on or after 6 April 2011 depends on the UK basic rate and higher rate bands.
Employer Bulletin 65 (April 2017)

Similary, it is the UK tax bands which apply to determine the amount of the savings nil rate band. Therefore, those Scottish taxpayers with total taxable income, after the personal allowance, of, say, £34,000 would be a Scottish higher rate taxpayer but a UK basic rate taxpayer, and so the amount of the savings nil rate band would be £1,000.

ITA 2007, s 12B(3), (4), (8)

All of the above shows the level of complexity which may be faced by Scottish taxpayers and is a potential trap for unwary advisers.

Note that the management and collection of income tax for Scottish taxpayers remains with HMRC, rather than being devolved to Revenue Scotland.
Draft Scottish Budget 2018/19, page 21

Definition of a ‘Scottish taxpayer’

A ‘Scottish taxpayer’ is someone who is resident in the UK under the statutory residence test and meets one of the following conditions:

  • the taxpayer’s only one place of residence in the UK is in Scotland and the taxpayer lives there for at least part of the tax year
  • the taxpayer has more than one place of residence in the UK and for at least part of the tax year the taxpayer’s main place of residence is in Scotland (ie he spends more time living there than in any place of residence elsewhere in the UK)
  • the taxpayer is a Member of the Scottish Parliament or a Member of the Westminster Parliament or the European Parliament representing a Scottish constituency

Scotland Act 1998, ss 80D, 80E

If none of these conditions apply and the taxpayer does not have a place of residence elsewhere in the UK which is his main residence, an individual may still be a Scottish taxpayer if he spends more days in Scotland during the tax year than anywhere else in the UK. For this purpose a day counts as spent in Scotland if the individual is there at midnight on that day.
Scotland Act 1998, ss 80D(3), 80F

See also the HMRC technical guidance on the definition of a Scottish taxpayer.

For commentary on the statutory residence test, see the Determining residence status (2013/14 onwards) guidance note.

Land and buildings transaction tax

The rates and bands for LBTT have been kept at current levels, with the exception of a new nil rate for first-time residential property buyers.

For the current rates and bands, see the Draft Scottish Budget 2018/19, page 24.

The nil rate for first-time buyers of residential property is expected to be £175,000 (the nil rate band for all other buyers of residential property is £145,000). Assuming the full £175,000 relief is utilised on the purchase of a property, the saving would be 2% of £30,000 (or £600). It is expected that this will mean 80% of first-time buyers in Scotland will pay no LBTT.  
Draft Scottish Budget 2018/19, page 25

The new nil rate for first-time buyers is expected to be introduced in April 2018, but will be subject to consultation. If the definition of first-time buyer follows the definition for stamp duty land tax (SDLT), it will only apply to an individual who has never owned residential property before.
Draft Scottish Budget 2018/19, page 25

It was widely expected that the Scottish Government would introduce relief for first-time buyers, following the similar SDLT relief announced by the Chancellor in Autumn Budget 2017.

The Land and Buildings Transaction Tax (Relief from Additional Amount) (Scotland) Bill is currently progressing through Parliament aimed at providing retrospective relief from the additional dwelling supplement (the 3% LBTT surcharge that applies to purchases of additional residential properties) where a couple purchase a property having sold a prior property they both occupied but where only one party was named on the title deeds.
Draft Scottish Budget 2018/19, page 24

The Scottish Fiscal Commission forecasts indicate that the retrospective additional dwelling supplement relief and the first time buyer’s relief will result in a drop in LBTT receipts of £5m in 2018/19.
Draft Scottish Budget 2018/19, page 25

Scottish landfill tax

The rates of Scottish landfill tax will be increased by RPI and to keep them in line with the rest of the UK. The standard rate will be increased to £88.95 per tonne and the lower rate will be set at £2.80 per tonne in 2018/19.
Draft Scottish Budget 2018/19, page 26

Air departure tax

The introduction of air departure tax in place of air passenger duty has been deferred pending resolution of issues around exemptions for flights from the Highlands and Islands. In the meantime air passenger duty will continue to apply in Scotland.  
Draft Scottish Budget 2018/19, page 29

Aggregates levy

The Scotland Act 2016 also provides powers for the introduction of a Scottish tax to replace the aggregates levy. The legal issues mentioned in the Draft Scottish Budget 2017/18 remain unresolved, and accordingly the devolved power remains in suspension.
Draft Scottish Budget 2018/19, page 29

Welfare benefits

The Social Security (Scotland) Bill was introduced on 21 June 2017. The stage 1 debate is scheduled for 19 December 2017.