Scottish Taxes- Are Changes Coming?

The Programme for Government published on 5 September by the Scottish Government has promised to deliver ‘the most progressive tax system in the UK.’ Could this mean further Income Tax rises to come in the next Scottish Budget? What changes could we see for Scottish Taxes?

No decision yet – but could more tax increases lie ahead?

The Cabinet Secretary for Finance Shona Robison’s statement set out Scotland’s objectives for the year, including delivering sustainable Scottish public finances. Separately, First Minister Humza Yousaf’s letter to the Finance Secretary also reinforced the expectation that the SNP will use their ’tax powers in the setting of the 2024-25 Budget to further progress delivery of the most progressive tax system in the UK’. Many are seeing this as a sign that another tax increase could be on the way.

During the SNP leadership election, the First Minister pledged to introduce a new tax band between the higher and top rates, covering earnings between £43,662 and £125,140. The Institute for Public Policy Research analysed this pledge assuming a new rate of Income Tax of 45% for those earning above £58,285, which would be a three-percentage point increase on the current rate. The think tank found that this would raise almost an additional £260 million, which would go some way towards addressing Scotland’s £1bn shortfall for day-to-day spending plans.

The impact of the Scottish rate of Income Tax

Anyone earning over £27,850 already pays more tax in Scotland than they would do if they lived in England, and further tax increases would of course be deeply unpopular at a time when household incomes are already being squeezed. The Scottish Government’s decisions may therefore be constrained by Westminster’s course of action. In the Autumn 2022 UK Budget, plans were announced to cut the UK basic rate of Income Tax from 20% to 19% and the additional rate from 45% to 40%. Although that decision was swiftly reversed, Prime Minister Rishi Sunak has previously said that he hopes to reduce Income Tax once inflation is under control.

Organisations such as the Scottish Retail Consortium have also warned that the higher Scottish Income Tax is making it more difficult to attract and retain staff. The increased tax burden may make it harder to lure highly paid senior staff north of the border. Further tax increases may also introduce the risk of behavioural changes where higher earners seek to reduce their taxable earnings or move elsewhere.

The tax impact for a Scottish taxpayer with taxable earnings of £50,000, £100,000 or £150,000 as compared to a UK taxpayer in 2023/24 is outlined below. This assumes individuals are in receipt of the standard UK Personal Allowance – those earning over £100,000 see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

Wealth taxes are not off the table

Another idea up for consideration by the Scottish Government may be the creation of a wealth tax. The Telegraph reported that Humza Yousaf as saying that ‘we shouldn’t rule wealth taxes off the table’ and cited a report by the Scottish Trade Union Congress, which discussed various options for increasing taxes in Scotland. This includes a wealth tax which could be based on the value of property, pensions and personal valuables such as paintings, jewellery and antiques.

As the devolved government does not have the authority to introduce new Scotland-wide taxes, any wealth tax would have to be created as a local tax. The Chartered Institute of Taxation cautioned that this could be ‘complex and costly’ and other options such as council tax reform may be an easier target. This was reiterated in Holyrood’s Finance and Public Administration Committee evidence session, held on 19 September with a group of economists and academics. The submission from Joao Sousa, the Fraser of Allander Institute’s deputy director, outlined that a wealth tax would be ‘very difficult not just in the context of devolution, but in terms of any realistic timeline for implementation.’

Introducing a new tax would require significant time for design and consultation- case in point being council tax, which the SNP pledged to abolish in their 2007 election manifesto. It remains based on property valuations from 1991 and if reform is intended to raise revenue, there is likely to be significant resistance. It’s therefore very unlikely that a wealth tax could be introduced in time for the next financial year, but with a Scottish Government spokesperson telling the Telegraph that the power to tax wealth should be devolved so that the ‘taxation of wealth could be redesigned to work effectively in a modern, Scottish-specific context’ this could be something to look out for in the future.

Other points to note

• Plans to give councils the power to double council tax on second homes will go ahead. Previously some second homes were entitled to a 50% discount, depending on the council, but legislation will be introduced to bring the charges in line with long-term empty properties and enable councils to apply up to a 100% premium.
• The Scottish Government will aim to introduce a devolved equivalent to the UK Aggregates Levy.
• It will also seek devolution of powers to introduce a Building Safety Levy, similar to a UK Government plan for England that will ensure residential developers remediate unsafe cladding.

Scottish Budget possibly delivered on 14 December

14 December is the likely date for the next Scottish Budget, following the UK Autumn Statement taking place on 22 November. Watch this space for more updates from our Private Client team! If you have any queries about the upcoming changes please do not hesitate to get in contact with Jill Walker or Fiona Rooney.