19 December 2017

Scottish Budget 2017: What were the key announcements?

Morag Watson provides an overview and analysis of the key announcements made by Derek Mackay during the Scottish Budget on Thursday 14 December.

Derek Mackay, the Scottish Finance Minister, presented his draft budget for 2018/19 to Holyrood on Thursday 14 December. The tax proposals represent the first indication that, going forward, the Scottish tax system is going to look quite different to that south of the border.

Scotland’s tax raising powers still remain relatively limited, and apply only to Scottish taxpayers’ ‘non-savings, non-dividend income’. This covers employment income, income earned by the self-employed and partners, and also income derived from the letting of property. In general, a Scottish taxpayer is one who spends the majority of their time in Scotland. Part of the complexity going forward, if the measures are agreed, will be the interaction between the Scottish system and that applying to the rest of the UK. Savings income and dividend income of Scottish taxpayers remains subject to tax rates and bands set by Westminster.

As a summary, the main changes proposed for 2018/19 are as follows:

  • Income up to £11,850 will be free of tax – this represents the level of personal allowance which is set by Westminster.
  •  Income between £11,850 and £13,850 will fall into a new starter band and will be taxed at 19%.
  •  Income between £13,850 and £24,000 will fall into the basic rate band and the basic rate of tax has been frozen at 20%.
  •  Income between £24,000 and £44,273 will fall into a new intermediate band and will be taxed at 21%.
  •  Income between £44,273 and £150,000 will be taxed at a higher rate, which has been increased by 1% from 40% to 41%.
  •  Income over £150,000 will be taxed at the additional rate, which has similarly been increased by 1% from 45% to 46%.

Analysis of the impact of these changes suggests that lower paid individuals will be slightly better off in 2018/19 in comparison to 2017/18, and in comparison to the rest of the UK. The tipping point in relation to the rest of the UK is income of around £26,000, whereas in Scotland it will be around £33,000. Due to the increases in the tax bands, someone with income of £50,000 will be better off in Scotland in 2018/19 than in 2017/18, however they will be £655 worse off than someone with the same income living elsewhere in the UK.

Those with income over £150,000 are going to see the biggest rise in tax liabilities, with their bills increasing by £1,174 in 2018/19 compared to 2017/18, and by £1,774 in comparison to the rest of the UK.

Other changes announced by Derek Mackay included an extension of the nil rate band in relation to Land and Buildings Transaction Tax (LBTT) paid by first-time buyers. Houses purchased for up to £145,000 are currently free from LBTT, and for first-time buyers this will be extended to £175,000. It was widely thought that Scotland might introduce some further measure of relief for first-time buyers, given Philip Hammond’s announcement in the UK budget in November 2017. However, the Scottish position remains far behind that of the rest of the UK. Mr Hammond’s nil rate band covers purchases by first-time buyers of houses worth up to £300,000, whereas someone purchasing a house of this value in Scotland would be subject to LBTT of £4,000.

The draft budget proposal will now be debated by the Holyrood Parliament, however the minority SNP Government will need the support of at least one other party in order to eventually pass the budget, with the final vote due to be held on 19 February 2018. 

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