The Draft Scottish Budget 2018/19

The Scottish draft Budget is just as important as the Welsh and United Kingdom (UK) Budgets.

In fact, in Derek Mackay’s draft Budget presented on 14 December 2017, arguably, the one in Scotland was more exciting than the UK one. After all, there were no real surprises in the UK one and most people could have predicted with considerable accuracy the increases to the tax bands, National Insurance bands etc. 

Though many UK payroll and reward professionals have been on tenterhooks waiting to complete the UK picture and were waiting on Mr Mackay’s announcement about what he was going to do with the Scottish Income Tax System.

No!

Income Tax powers are not devolved but are shared with the United Kingdom. This means that part of the system is reserved so that it remains the same UK-wide and part is devolved. 

The part that is devolved is the setting of rates and thresholds for non-savings and non-dividend taxable income (NSND).

Before looking at the announcement itself, it is worth looking at some background. On 02 November 2017, First Minister Nicola Sturgeon introduced a Discussion Paper entitled ‘The Role of Income Tax in Scotland’s Budget’. This was all for the purposes of initiating a discussion on what rate and bands should apply for the tax year 2018/19.

In this November document, Derek Mackay, Cabinet Secretary for Finance and the Constitution said he believed that there were four key tests to be met in any Income Tax decision:

1. Income Tax policy should help maintain and promote the level of public services which people in Scotland expect
2. The lowest earning taxpayers should not see taxes increase
3. Any tax changes should make the tax system more progressive and reduce inequality
4. The changes made, along with decisions on spending, should support the economy

Before looking at the proposals in the draft Budget, I thought that the following statement was interesting in the report on page 21:

HMRC is responsible for the collection and management of Scottish income tax. The Scotland Act 2012 defines a Scottish taxpayer as someone who is a UK taxpayer and has their main place of residence in Scotland. HMRC will continue to take actions to maintain and improve the accuracy of its Scottish taxpayer database. A Service Level Agreement exists between the Scottish Government and HMRC to ensure that Scottish taxpayers and the employers of Scottish taxpayers continue to be treated in the same way as income taxpayers in the rest of the UK.

Whilst the definition of s Scottish Taxpayer is largely correct, it is a little over simplified. Even the guidance on the GOV.UK Website does not give the full picture. What is more interesting is the apparent acknowledgement that not all Scottish Taxpayers have been correctly identified by HMRC. 

In this regard, it will be interesting to see any research on how many have been misclassified. Further, I wonder if the Service Level Agreement gives any ‘tolerances’ if there are misclassifications.

The Scottish Rate of Income Tax (SRIT) ceased to exist from 2017/18. Even though Scotland had the power to make changes for 2017/18, these were not been changed from the ones that applied in rUK (rest of the United Kingdom) countries.

 In the draft Scottish Budget on 14 December 2017, Derek Mackay confirmed that there will be 5 rates of tax for Scottish Taxpayers:

• Importantly, the Scottish Basic Rate remains at 20% but
• There is the introduction of a new Scottish Starter Rate at 1% below this
• Further, there is the introduction of a Scottish Intermediate Rate of 21%
• The Higher rate increases by 1%
• The Additional rate is renamed Top Rate and also increases by 1%

 In all, the Scottish bands and rates are as follows:

This compares with the rUK bands and rates as follows:

The Budget report says that the Scottish Income Tax rates ‘strikes the correct balance between making our tax system more progressive, raising revenues and ensuring that our tax changes do not damage our economic competitiveness’. This is in light of research that suggested greater increases to the Higher and Top percentages would have resulted in a fall in Income Tax revenue.

It is a comfort that the Basic rate is the same for rUK and Scottish Taxpayers at 20%. Any variance would have had implications for Relief at Source pension schemes where the payroll made the deduction net of Basic rate relief. 

Mr Mackay proposed the following thresholds for each of the above rates of Income Tax:

This compares with the rUK thresholds as follows:

However, the Budget report looks at the above bands and includes the UK-wide Personal Allowance of ￡11,850 for 2018/19. So, combining the thresholds with the rates and comparing to the situation in 2017/18 gives the following:

This compares with the rUK equivalent as follows:

The Scottish Government states that, including the value of the increase UK-wide Personal Allowance, the above proposals means that nobody with NSND taxable income less than ￡33,000 will pay more in Income Tax than they did in 2017/18.

Does the above meet the Scottish National Party’s (SNP) Manifesto for Government from 2016? This said:

• We will freeze the Basic Rate of Income Tax throughout the next Parliament to protect those on low and middle incomes
• We will also ensure that by 2021/22 the amount of income that can be earned without any income tax being paid rises to ￡12,750 by creating a new zero-rate band
• We will freeze the Higher Rate threshold in real terms in 2017/18 and increase it by a maximum of inflation until 2021/22

Remember the Flexible Workforce Development Fund (FWDF)? This was Scotland’s response to the UK-wide Apprenticeship Levy where, in partnership with colleges, employers could apply for monies for the up-skilling and re-skilling of their workforce. 

Originally a one-year pilot, page 18 confirms that in 2018/19 the FWDF will be further developed and refined, implying that it will continue to be available. 

Have a look at page 73 for another example of devolution in practice. 

Under ‘Higher Education Student Support Priorities’ is the passage that in 2018/19 the Scottish Government will raise the repayment threshold for Student Loans. This is so that, by the end of the current Parliamentary session, ex-graduates will not start to repay their Loan until they are earning ￡22,000. Further, the maximum repayment period will be reduced from 35 to 30 years. 

Unfortunately not!

The draft Budget on 14 December 2017 is only the start of the Scottish Budget ‘Scrutiny’. This is a process through which the draft will become the Budget (Scotland) Act and the proposed timetable is as follows:

However, let’s assume that the above rates and thresholds are agreed and ratified following Scrutiny (mid–February 2018 for the start of the new tax year a few weeks later). 

Surely, the sharing of Income Tax powers will seem to be meeting the purpose of devolution of the first place. That is to recognise that there are some things that are controlled more appropriately from the individual nations within the United Kingdom rather than from Westminster.