A discussion paper outlines four possible approaches to setting Scottish income tax rates and bands.
With a Budget at Westminster on 22 November, Derek Mackay will follow suit at Holyrood on 14 December. Preparing the ground, the Scottish government has published a discussion paper on the role of income tax in Scotland’s Budget and has held meetings with interested organisations. The paper outlines four possible approaches for 2018/19.
Around 30% of devolved Scottish public expenditure for 2018/19 is likely to be funded by Scottish income tax, with a further 7% coming from other devolved taxes. The total will rise to around 50% once half the VAT revenues raised in Scotland (at UK rates) are assigned from 2019/20 onwards.
Thus, less than 40% of Scotland’s public spending power in 2018/19 can be directly impacted by tax decisions made by the Scottish government and Parliament, with income tax being by far the largest component. The balance of spending will be funded by the continuing block grant from Westminster, based on the Barnett formula.
There are numerous fiscal options but also significant constraints. As discussed in Tax Journal (15 November 2017), the role Scottish income tax can play is limited because it is not wholly devolved; it is part of the UK-wide income tax regime, largely controlled by Westminster and wholly administered by HMRC.
The paper notes that given the austerity imposed by the UK government, the uncertainty and economic impact of Brexit and the demand for high quality public services in Scotland:
income tax policy should help maintain and promote the level of public services which Scots expect;
the lowest-earning taxpayers should not see their taxes increase;
any tax changes should make the tax system more progressive and reduce inequality; and
the decisions made on taxes and spending should support the economy.
There is also analysis of how many taxpayers there are at each tax rate. Currently, of the 4.5m adults in Scotland, 2m (44%) pay no Scottish income tax because they have earnings below the level of the personal allowance. Of the remaining 2.5m (56%), around 2.15m pay Scottish income tax at only the basic rate, while 346,000 are classified as higher rate and 20,000 as additional rate taxpayers.
Recognising the need for a minority government to secure political support, the paper summarises the income tax policies of all Scottish political parties represented at Holyrood, based on their 2016 election manifestos, and sets out four possible approaches to the income tax rates and bands. Many commentators expect the rates to rise, due to the Scottish social contract being generous in its provision of benefits. Others have noted the need to encourage entrepreneurial activity to attract talent, grow the economic and thus the tax base.
Approach 1 – a three band regime: This would retain the three existing income tax bands, leaving the basic rate unchanged at 20p. The higher rate threshold would increase with inflation, and the higher rate would rise to 41p. The additional rate would be lifted to 46p, 48p or 50p.
Approach 2 – a four band regime: Based around the median income for low earners, earnings between £11,850 and £24,000 would continue to be taxed at 20p. Earnings between £24,001 and £44,290 would be taxed at 21p; between £44,291 and £150,000 at 41p. The additional rate would be increased from 45p to 48p or 50p – possibly in stages.
Approach 3 – a five band regime: Splitting the higher rate tax band, and the higher rate threshold increasing in line with inflation, earnings between £44,291 and £75,000 would be taxed at 41p; between £75,001 and £150,000 at 42p.
Approach 4 – a six band regime: Using this approach, earnings between £11,850 and £15,000 would be taxed at 19p and between £15,001 and £24,000 at 20p. Other rates and bands would follow a similar pattern to approach 3.
The paper tabulates the behavioural and financial impact of the different approaches on the 2.5m income tax payers in Scotland by comparing the tax they would pay in 2018/19 with that under the current regime. Lost revenue through behavioural change is projected at £50m under approach 1, or as high as £200m under each of the other options.
Overall, the discussion paper offers a refreshingly transparent view of the thinking we can expect to support Mackay’s draft proposals on Scottish income tax on 14 December, and an intriguing insight into the party-political machinations around it.
Home >Articles > The role of income tax in Scotland’s Budget
The role of income tax in Scotland’s Budget
A discussion paper outlines four possible approaches to setting Scottish income tax rates and bands.
With a Budget at Westminster on 22 November, Derek Mackay will follow suit at Holyrood on 14 December. Preparing the ground, the Scottish government has published a discussion paper on the role of income tax in Scotland’s Budget and has held meetings with interested organisations. The paper outlines four possible approaches for 2018/19.
Around 30% of devolved Scottish public expenditure for 2018/19 is likely to be funded by Scottish income tax, with a further 7% coming from other devolved taxes. The total will rise to around 50% once half the VAT revenues raised in Scotland (at UK rates) are assigned from 2019/20 onwards.
Thus, less than 40% of Scotland’s public spending power in 2018/19 can be directly impacted by tax decisions made by the Scottish government and Parliament, with income tax being by far the largest component. The balance of spending will be funded by the continuing block grant from Westminster, based on the Barnett formula.
There are numerous fiscal options but also significant constraints. As discussed in Tax Journal (15 November 2017), the role Scottish income tax can play is limited because it is not wholly devolved; it is part of the UK-wide income tax regime, largely controlled by Westminster and wholly administered by HMRC.
The paper notes that given the austerity imposed by the UK government, the uncertainty and economic impact of Brexit and the demand for high quality public services in Scotland:
income tax policy should help maintain and promote the level of public services which Scots expect;
the lowest-earning taxpayers should not see their taxes increase;
any tax changes should make the tax system more progressive and reduce inequality; and
the decisions made on taxes and spending should support the economy.
There is also analysis of how many taxpayers there are at each tax rate. Currently, of the 4.5m adults in Scotland, 2m (44%) pay no Scottish income tax because they have earnings below the level of the personal allowance. Of the remaining 2.5m (56%), around 2.15m pay Scottish income tax at only the basic rate, while 346,000 are classified as higher rate and 20,000 as additional rate taxpayers.
Recognising the need for a minority government to secure political support, the paper summarises the income tax policies of all Scottish political parties represented at Holyrood, based on their 2016 election manifestos, and sets out four possible approaches to the income tax rates and bands. Many commentators expect the rates to rise, due to the Scottish social contract being generous in its provision of benefits. Others have noted the need to encourage entrepreneurial activity to attract talent, grow the economic and thus the tax base.
Approach 1 – a three band regime: This would retain the three existing income tax bands, leaving the basic rate unchanged at 20p. The higher rate threshold would increase with inflation, and the higher rate would rise to 41p. The additional rate would be lifted to 46p, 48p or 50p.
Approach 2 – a four band regime: Based around the median income for low earners, earnings between £11,850 and £24,000 would continue to be taxed at 20p. Earnings between £24,001 and £44,290 would be taxed at 21p; between £44,291 and £150,000 at 41p. The additional rate would be increased from 45p to 48p or 50p – possibly in stages.
Approach 3 – a five band regime: Splitting the higher rate tax band, and the higher rate threshold increasing in line with inflation, earnings between £44,291 and £75,000 would be taxed at 41p; between £75,001 and £150,000 at 42p.
Approach 4 – a six band regime: Using this approach, earnings between £11,850 and £15,000 would be taxed at 19p and between £15,001 and £24,000 at 20p. Other rates and bands would follow a similar pattern to approach 3.
The paper tabulates the behavioural and financial impact of the different approaches on the 2.5m income tax payers in Scotland by comparing the tax they would pay in 2018/19 with that under the current regime. Lost revenue through behavioural change is projected at £50m under approach 1, or as high as £200m under each of the other options.
Overall, the discussion paper offers a refreshingly transparent view of the thinking we can expect to support Mackay’s draft proposals on Scottish income tax on 14 December, and an intriguing insight into the party-political machinations around it.
