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Scottish Draft Budget 2018-2019

Scottish Draft Budget 2018-19

Our ‘on a page’ document covers the key measures from the Scottish Draft Budget 2018/19.

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Partner, Head of Tax in Scotland

KPMG in the UK

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Scottish Draft Budget 2018/19 - illustration of buildings

Our view

Alan Turner, Partner, Head of Tax in Scotland, commented:

“In today’s Scottish Draft Budget, Derek Mackay announced changes to the income tax system in Scotland that are forecast to raise an additional £164 million to fund public spending. The changes signal a significant departure from the rest of the UK, with two additional bands introduced and a 1% increase to the Higher and Additional Rates of Income Tax. In its discussion paper on the future of income tax in Scotland, published last month, the Scottish Government stated that two key objectives from any reform would be to make the Scottish income tax system more progressive and protect those who earn the least.  From the announcements made today, we agree that those objectives have been achieved.

It remains to be seen what the response will be from those who are being asked to contribute more; there will no doubt be significant pressure to demonstrate value for money. Businesses seeking to recruit talent in Scotland from elsewhere in the UK will have to consider whether to offer more money to equalise take home pay disparity. Practically, the introduction of two additional bands from April 2018 will also require employers to work with their payroll providers to ensure that they are ready.

The changes to LBTT for first time buyers are a welcome introduction for the property sector and are, no doubt, a direct response to similar announcements made in relation to Stamp Duty Land Tax in the UK Budget last month.In summary, this is the most significant Scottish Budget to date and the changes announced mark a further departure from the tax system in the rest of the UK.”

What you need to know

Read our 'on a page' document for a helpful summary of the Scottish Draft Budget. 

 

Derek Mackay today introduced the proposed Scottish Draft Budget for 2018/19, which included wide-ranging changes to income tax rates and bands for Scottish Taxpayers.  New income tax bands (the Starter band and Intermediate band) were announced, as well as a 1% increase in the Higher and Additional Rates.

 

Income tax

In a measure which surprised many commentators, it is proposed to introduce a new 19% Starter Band on the first £2,000 of relevant income.

The other proposed changes had been more widely trailed and include:

  • The freezing of the Scottish Basic Rate at 20%;
  • The introduction of a Scottish Intermediate Rate on earnings between £24,000 and £44,273, set at 21%;
  • The increase of the Scottish Higher Rate threshold to £44,273 (compared with £46,350 in the rest of the UK); and
  • The increase of the Scottish Higher Rate to 41%, and the Scottish Additional Rate to 46%.

There will be winners and losers from these changes. 

Scottish taxpayers earning up to £26,000 will not pay any more tax than other UK taxpayers, and Scottish taxpayers earning less than £33,000 will pay less tax than in the 2017/18 tax year.

A Scottish taxpayer earning £50,000 will pay £655 more than other UK taxpayers, however, due to the increase of the Scottish Higher Rate threshold, they will actually pay £85 less than they did in 2017/18. 

The table below shows at a high level the impact of the proposed changes, although it should be noted that individuals’ personal circumstances will vary.

Income  2018/19 compared to 2017/18 2018/19 compared to other UK taxpayers 
£20,000 -£90 -£20
£30,000 -£30 +£40
£40,000 +£70 +£140
£50,000 -£85 +£655
£60,000 +£15 +£755
£70,000 +£115 +£855
£120,000 +£715 +£1,455
£160,000 +£1,274 +£1,874

(NB “-” denotes taxpayers paying less tax than compared with 2017/18 / other UK taxpayers, “+” denotes taxpayers paying more tax than compared with 2017/18 / other UK taxpayers).

Land and Buildings Transaction Tax (LBTT)

A relief for first time buyers will be introduced which raises the nil rate threshold to £175,000 (from £145,000).  Those buying a property for over £175,000 will also benefit from the relief on that portion of the purchase price below £175,000. 

This should provide an LBTT saving of up to £600 for first time buyers.

A consultation will be launched before the relief is introduced for 2018/19.

The Scottish Government introduced the Land and Buildings Transaction Tax (Relief from Additional Amount) (Scotland) Bill on 13 November 2017. 

The Bill, when enacted, will amend with retrospective effect the relief from the Additional Dwelling Supplement (ADS) where the buyers are spouses, civil partners or cohabitants and the buyer’s spouse, civil partner or cohabitant disposed of (or disposes of) a dwelling that was their only or main residence and both the buyer and the buyer’s spouse, civil partner or cohabitant intend to occupy the purchased dwelling as their only or main residence. 

Under the original legislation where spouses, civil partners or cohabitants jointly bought a dwelling, and within 18 months of the purchase they sold (or sell) their previous main residence, and that previous main residence was owned by one of them only, then the ADS was payable on the purchase (and not refunded on the sale). 

No changes were made to the rates and bands for LBTT, and the ADS remains at 3%. 

Environmental taxes

Scottish Landfill Tax (SLfT) continues to shadow its UK equivalent and the credit for contributions made to the Scottish Landfill Communities Fund remains capped at 5.6% of an operator’s total SLfT liability.

No announcements were made regarding the deferred introduction of Air Departure Tax (ADT), which was originally planned to replace Air Passenger Duty (APD) from 1 April 2018.  APD, rather than ADT, will therefore to apply to flights leaving Scottish airports for the foreseeable future.

Timing of the devolution of Aggregates Levy remains unclear.

Business rates

Scottish Business rate increases for 2018/19 will be capped at the September 2017 Consumer Price Index (3%) rather than September 2017 Retail Price Index (3.9%).

What happens next?

Notwithstanding that aspects of the Draft Budget were widely trailed, this represents a radical development for the UK tax system generally, and for Scottish taxpayers in particular. 

Whilst it should be remembered that the Scottish Government is a minority administration and will need support from opposition parties in order to pass its Budget, we expect that the proposed tax reforms will be enacted in a similar form to those set out today, especially given the other parties’ published positions on income tax. 

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