The Scottish Cabinet Secretary for Finance and the Constitution Derek Mackay set out his tax and spending plans for 2019/20 at Holyrood on 12 December 2018, all ‘under the shadow’ of Brexit. The Draft Budget and Budget Supporting Document are merged into a single document for the first time.
The Scottish draft Budget is just as important as the Welsh and United Kingdom (UK) Budgets. In the increasingly complicated and confusing world of devolution, the Scottish Budget outlines the tax rates and bands that will apply to Scottish Taxpayers as opposed to:
- The UK Budget which outlines the tax thresholds that apply to rUK Taxpayers (anyone who is not classed as a Scottish Taxpayer)
- The UK Budget which outlines the tax rates that apply to rUK Taxpayers (any UK Taxpayer that is not classed as a Scottish or Welsh Taxpayer)
- The Welsh Budget which outlines the rates of tax payable by Welsh Taxpayers under the Welsh Rates of Income Tax (WRIT)
A Devolved Income Tax System in the UK?
Income Tax is not devolved in the United Kingdom. It is referred to as a shared responsibility. 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 rates and thresholds set in the Scottish Budget for Scottish Taxpayers and
- The rates set in the Welsh Budget for Welsh Taxpayers
Both of these apply to income that is classed as non-savings and non-dividend taxable income (NSND).
The part that is reserved for the UK Government in Westminster is, effectively, everything else about the tax system. Importantly, this translates as the main taxation legislation (ITEPA 2003 and the associated Regulations) which include things such as what does and does not make-up taxable pay and the personal allowances.
Setting the scene of the 12 December Budget
Before looking at the announcements themselves, 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.
At the time, Derek Mackay said he believed there were four key tests to be met in any Income Tax decision and these have been maintained in setting the 2019/20 rates and thresholds:
- Income Tax policy should help maintain and promote the level of public services which people in Scotland expect
- The lowest earning taxpayers should not see taxes increase
- Any tax changes should make the tax system more progressive and reduce inequality
- The changes made, along with decisions on spending, should support the economy
Whilst they say largely the same thing, these four tests are put another way on the Scottish Government’s own Website.
As stated above, although HMRC receives the tax revenue, the Scottish Government is allocated the Income Tax collected on non-savings and non-dividend (NSND) income – Income Tax on savings and dividends is paid to the UK Government, at the rates and bands it sets.
The Budget Report makes reference to Scottish Taxpayers on pages 27 and 28 and gives the basic definition as ‘someone who is a UK taxpayer and has their main place of residence in Scotland’. This is a little simplified and, perhaps, HMRC’s Scottish Taxpayer Technical Guidance on Gov.UK gives the better and fuller definition. As the NSND Income Tax revenue is so important for Scotland’s finances, it is essential that employee’s maintain their addresses if and when they move. Employers might want to point individuals to https://www.gov.uk/tell-hmrc-change-address in this regard.
The Report also makes reference to the Service Level Agreement between the Scottish Government and HMRC and this is also worth highlighting for completeness.
Derek Mackay confirmed that the 5 rates of tax for Scottish Taxpayers will remain unchanged. Therefore:
- The Scottish Starter Rate remains at 19%
- The Scottish Basic Rate remains at 20%
- The Scottish Intermediate Rate remains at 21%
- The Scottish Higher rate remains at 41% and
- The Scottish Top Rate remains at 46%
This can be represented alternatively as follows:
This compares with the rUK (rest of the United Kingdom) bands and rates as follows:
The draft Budget Report says on page 28 that the 2018/19 changes that saw the introduction of the new rates and bands ‘should be seen as settled for the remainder of the Parliament’. I don’t remember that commitment but it is good to see that there is one. This provides certainty at least for employers, individuals and developers.
The main announcements were that the Scottish Higher rate threshold will be frozen in 2019/20, with Mr Mackay not passing on the increase to the similar threshold applying to rUK Taxpayers by the UK Chancellor. Therefore, the only bands that are changed in the draft proposals are those applying to the Scottish Starter and Scottish Basic, both increased by the rate of inflation.
Mr Mackay proposed the following thresholds for each of the above rates of Income Tax:
|Scottish Starter||1 – 2,000||1 – 2,049|
|Scottish Basic||2,001 – 12,150||2,050 – 12,444|
|Scottish Intermediate||12,151 – 31,580||12,445 – 30, 930|
|Scottish Higher||31,581 – 150,000||30,391 – 150,000|
|Scottish Top||Over 150,000||Over 150,000|
(The above will be set by Scottish Rate Resolution under section 80C of the Scotland Act 1998. This is scheduled for week commencing 18 February 2019).
The above thresholds for Scottish Taxpayers compare with the rUK thresholds as follows:
|Basic||1 – 34,500||1 – 37,500|
|Higher||34,501 to 150,000||37,501 – 150,000|
|Additional||Over 150,000||Over 150,000|
The Scottish draft Budget report looks at the above bands and includes the UK-wide Personal Allowance of £12,500 for 2019/20. So, combining the thresholds with the rates and comparing to the situation in 2018/19 gives the following:
|Starter||11,851 – 13,850||19||12,501 – 14,549||19|
|Basic||13,851 – 24,000||20||14,550 – 24,944||20|
|Intermediate||24,001 – 43,430||21||24,945 – 43,430||21|
|Higher||43,431 – 150,000||41||43,431 – 150,000||41|
|Top||Over 150,000||46||Over 150,000||46|
This compares with the rUK equivalent as follows:
|Basic||11,851 – 46,350||20||12,501 – 50,000||20|
|Higher||46,351 to 150,000||40||50,001 to 150,000||40|
|Additional||Over 150,000||45||Over 150,000||45|
The decision to freezer the Higher Rate threshold has a consequence for employees in the earnings bracket £43,430 to £50,000. Unlike their rUK counterparts, these individuals will pay Income Tax at a higher marginal rate but also have to pay National Insurance at the highest rate as well (12%). This is because the Upper Earnings Limit is set at £50,000 UK-wide.
Also, compare the draft Budget announcements to three commitments in 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’ – achieved
- ‘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’ – you wonder if this will be necessary given that the Personal Allowance is set to increase in 2021/22 by the rate of Consumer Prices Index inflation
- ‘We will freeze the Higher Rate threshold in real terms in 2017/18 and increase it by a maximum of inflation until 2021/22’ – I don’t see that this has been achieved. Mr Mackay froze the Higher Rate threshold in order to invest in public services
Its not all about tax
Given the scale of devolution and sharing, it is important for payroll and reward professionals to review the entire Budget document. Here are some other things that are worth noting:
Early Learning and Childcare
Whilst not strictly reward-related, the withdrawal of Employer-Supported Childcare tax and NICs advantages to new entrants from 04 October 2018 has focused parents’ minds on the levels of childcare support available in each of the UK’s nations.
Whilst Tax-Free Childcare applies UK-wide, the provision of free childcare is a devolved responsibility. The December 2018 Draft Scottish Budget pledges the funding for Early Learning and Childcare (ELC) entitlement to be extended to 1,140 hours from August 2020.
Social Security Scotland
Something that we are going to have to keep an eye on is the remit of Social Security Scotland (SSA), established by the Social Security (Scotland) Act 2018. At the moment, there are 9 types of ‘assistance’ payments that can be made by the new agency. These are, essentially, top-up payments to benefits that might already be paid by the UK Government (carer’s top-ups, winter heating top-ups etc, all contained in Chapter 2 of the above Act).
No payments are employment-related – at the moment. It is unlikely that things such as Statutory Maternity Pay and Leave will be devolved, as these issues are reserved for the UK Government. Yet, we have to keep a watch on things!
Value Added Tax (VAT)
The Scotland Act 1998 (as amended by the Scotland Act 2016) now provides for the first 10 pence of the Standard Rate of VAT and the first 2.5 pence of the Reduced Rate to be assigned directly to the Scottish Government.
Whilst this ‘Assignment Model’ is yet to be finalised, the draft Budget says that 2019/20 will be classed as a transitional year, where VAT assignment will be forecast and calculated but with no impact on the Scottish Government’s revenue. This will come into effect from 2020/21, assuming that the model has both UK and Scottish Government assurances.
The Flexible Workforce Development Fund
The Flexible Workforce Development Fund (FWDF) is Scotland’s response to the UK-wide Apprenticeship Levy where, in partnership with colleges, employers can apply for monies for the up-skilling and re-skilling of their workforce.
Originally a one-year pilot in 2017, page 92 confirms that in 2019/20 the FWDF will continue with £10 million funding.
Whilst the FWDF is not solely to do with apprenticeships, the Draft Budget also a target of 30,000 apprentices by 2020 through Foundation, Modern, and Graduate Apprenticeships, administered by Skills Development Scotland.
The Scottish Public Pensions Agency
The Scottish Public Pensions Agency (SPPA) administer the pensions for employees of the National Health Service, Teachers’, Police and Firefighters’ schemes in Scotland.
The Draft Budget confirms on page 94 that 2019/20 will see the integration of pension and payroll systems into a single operating platform.
So there we have it?
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:
|12 December 2018||Publication of Draft Budget|
|12 December 2018||
Publication of associated documents:
|12 December 2018||Publication of Level 4 budgets (on devolved issues)|
|19 December 2018||Budget Bill Introduced|
|w/c 28 January 2019||Budget Bill Stage 1|
|w/c 04 February 2019||Budget Bill stage 2|
|w/c 18 February 2019||Scottish Rate Resolution|
|w/c 18 February 2019||Budget Bill stage 3|
And (x 2)
Throw into the mix that the SNP are a minority administration and the Budget will not pass without getting others on board. In the last couple of years, this help has come from the Scottish Green Party with amendments made to get them on side. This year, the Greens have stated that they will not enter Budget talks until Mr Mackay gives an assurance that the Council Tax will be abolished in Scotland.
Plus, Mr Mackay says that there may be a need to reassess the Scottish Government’s spending plans if there is a no-deal or cliff-edge EU Exit.
However, for the sake of argument, let’s assume that the above rates and thresholds are agreed and ratified following Scrutiny (mid–February 2019 for the start of the new tax year a few weeks later). Surely, the sharing of Income Tax powers meet 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.