Payroll and software developer professionals will be interested in the tax rates and thresholds that are PROPOSED in the Budget. They are not ratified until after the Budget has gone through the ‘scrutiny’ process in Edinburgh.
As I always say, 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 and Welsh Taxpayers (i.e. 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 for Westminster (UK) 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.
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 a number of times and also makes reference to ‘Revenue Scotland’. Even though the Report makes it clear, it is worth saying that Revenue Scotland deals with taxes that are wholly devolved to Scotland (Land and Buildings Transaction Tax (LBTT) and Scottish Landfill Tax (SLfT)). Income Tax is not a devolved tax and the identification of a Scottish Taxpayer is the responsibility of the UK tax collection agency HMRC.
For information, HMRC’s Scottish Taxpayer Technical Guidance on Gov.UK gives a good and full definition of who is or can be a Scottish Taxpayer. 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.
Kate Forbes 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 which the Scottish Budget assumes will remain unchanged:
The fact that the rates remain unchanged is little surprise. Page 28 of the draft Budget Report for tax year 2019/20 says on page 28 that when the new rates were first implemented in tax year 2018/19 that this ‘should be seen as settled for the remainder of the Parliament’.
The Scottish Parliament runs until May 2021.
The main announcements were that the Scottish Basic and Intermediate Rate thresholds for 2020/21 have been increased by inflation. The Scottish Higher and Top rate thresholds are frozen at 2019/20 levels.
These proposals have been made on the assumption that the Personal Allowance will remain at £12,500 (not shared with Scotland) and the Higher Rate threshold for rUK Taxpayers will remain at £50,000.
Therefore, the draft Budget proposed the following thresholds for each of the above rates of Income Tax:
|Scottish Starter||1 – 2,049||1 – 2,085|
|Scottish Basic||2,050 – 12,444||2,086 – 12,658|
|Scottish Intermediate||12,445 – 30, 930||12,659 – 30, 930|
|Scottish Higher||30,391 – 150,000||30,391 – 150,000|
|Scottish Top||Over 150,000||Over 150,000|
(The above will be set by Scottish Rate Resolution (SRR) under section 80C of the Scotland Act 1998. A letter from Kate Forbes indicates that the SRR will be ‘lodged’ on 02 March with expected ratification on 04 March 2020).
This is not totally helpful, as it does not truly show the band of earnings that are taxable at the relevant Scottish rates. Maybe the below is a better representation:
|Scottish Top||Over 150,000||Over 150,000||0|
The Scottish draft Budget report looks at the above bands and includes the UK-wide Personal Allowance of £12,500 for 2020/21. So, combining the thresholds with the rates and comparing to the situation in 2019/20 gives the following:
|Starter||12,501 – 14,549||19||12,501 – 14,585||19||+36|
|Basic||14,550 – 24,944||20||14,586 – 25,158||20||+178|
|Intermediate||24,945 – 43,430||21||25,159 – 43,430||21||-214|
|Higher||43,431 – 150,000||41||43,431 – 150,000||41||0|
|Top||Over 150,000||46||Over 150,000||46||0|
The proposal to increase the lower thresholds by inflation reduces the Income Tax payable for Scottish Taxpayers paying at the marginal rate in these brackets. Or, lifts them out of Income Tax liability altogether.
The decision to freeze the Higher Rate threshold continues to have a consequence for employees in the earnings bracket £43,430 to £50,000. Unlike their rUK counterparts, these Scottish Taxpayers 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 for 2020/21 is proposed to be 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’ – the rate (20%) has been frozen so this is 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’ – I still wonder if this will be necessary given that the current Personal Allowance is set to increase from 2021/22 onwards 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. Both this tax year and next tax year, the Higher Rate threshold has been frozen. The 2020/21 freeze is explained that this delivers on the commitment for a progressive tax system and will ‘raise additional revenue to invest in vital public services and the Scottish economy’
It’s 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:
The SNP have been vocal in their dislike / opposition to the UK leaving the European Union (EU). This is reflected in Scotland anticipated growth figures (pages 10 and 11). Leaving the EU and the attempts to ‘mitigate’ any damaging impacts are mentioned throughout the Report.
There is also the statement that the Scottish Government has asked for immigration powers to be devolved so that a ‘Scottish Visa’ system could be introduced. This would allow Scotland to attract the workers that it believes it needs rather than have to rely on a UK-wide immigration system.
Page 11 indicates that the Scottish Government is prioritising the areas that it sees will be heavily impacted by existing the EU – the economy, transport, food and drink, medicines, agriculture, fisheries and the rural economy.
Chapter 3 of the Budget Report looks at the ‘National Infrastructure Mission’ for the duration of this Parliamentary session and the next. This states that the priorities will be boosting Scotland competitiveness and responding to climate change. Climate change priorities are covered in more detail in Chapter 11.
Scottish Teachers Pension Scheme
In recognition of increased employer pension contributions, the Budget proposes local governments are allocated £97 million. This seems to be a similar arrangement to the UK Government’s proposals to support the Teachers’ Pension Scheme in England and Wales.
Early Learning and Childcare
Although not strictly payroll or reward-related, the December 2018 Draft Scottish Budget (for 2019/20) pledged the funding for Early Learning and Childcare (ELC) entitlement to be extended to 1,140 hours from August 2020. The 2020 Draft Budget pledges an additional £201 million revenue and £121 million capital to support this expansion.
Budget 2019/20 contained the view that the current Council Tax system was not right for Scotland. The current Report advises that cross-party talks have been initiated to identify an alternative that would get Parliament’s support (given that the SNP are a minority administration). If an alternative is found, legislation will be published by the end of this Parliament with a view to it being taken forward in the next Parliament.
Workplace Parking Levy
The Transport (Scotland) Act 2019 created the power for councils to introduce a Workplace Parking Levy (WPL) if they deemed it appropriate. This was all part of the agreement to pass last year’s Budget with the help of the Scottish Greens.
The WPL would see employers charged a levy for parking spaces provided for certain employees. The issue for employees is whether their employer chooses to pass on the cost of the WPL to them. This is due for introduction in 2020 and is one to watch out for.
Fair Work Future for Scotland
One to look for if you are an employer of employee in Scotland. There is a general initiative to make Scotland a nation with a ‘word-leading working life’, where a fair workplace drives success for both individuals and companies.
The Budget pledges ‘the first investment in the £3 million Access to Childcare Fund to develop childcare solutions that will, alongside the ELC expansion, assist parents to access wrap around care that could assist them to maximise employment opportunities’.
Page 95 of the Report is worth looking it, if only to understand the commitment to Fair Work and a reminder of the Flexible Workforce Development Fund (FWDF) that provides access to funding for apprenticeships. Indeed, apprenticeships are mentioned again at Chapter 8 when there is talk of real-terms investment in the skills and training budget to support the drive to increase the number of apprenticeships in Scotland.
Scottish Student Loans
The Higher Education Student Support (HESS) allocated budget, administered by Student Awards Agency Scotland (SAAS), will allow the delivery of increasing the Plan 1 threshold for Scottish borrowers to £25,000 from April 2021.
This is one for everyone to look out for, not least the legislation behind it and how HMRC will identify Scottish Plan 1 borrowers from other borrowers in the UK.
Concessionary Fares and Bus Services
Not payroll or reward-related at all, however, it is interesting to see that there is a commitment to continue the current system of concessionary travel for older and eligible disabled people. See the Transport Scotland Website for information.
I say that it is interesting merely because concessionary travel is a devolved issue and what happens in England is certainly not replicated in a much more generous Scotland.
Social Security Scotland
Something that we are going to have to keep a continued eye on is the remit of Social Security Scotland (SSA), established by the Social Security (Scotland) Act 2018. At the moment, there are several types of ‘assistance’ payments that can be made by the 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).
However, Disability Assistance for Children and Young People (DACYP) starts in 2020-21, replacing UK Disability Living Allowance for children in Scotland. Further, there are new devolved powers for Attendance Allowance, Disability Living Allowance, Industrial Injuries Disablement Allowance, Personal Independence Payment and Severe Disablement Allowance in 2020/21. In short, this agency is getting increased and significant powers. 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!
So there we have it?
The draft Budget on 06 February 2020 is only the start of a Scottish Budget ‘Scrutiny’ that will have to be accelerated this year if the Budget Bill is to be ratified and a SRR passed before the start of the tax year. This is a process through which the draft will become the Budget (Scotland) Act.
There is no proposed timetable at the moment, save for the letter from Kate Forbes that indicates the Scottish Rate Resolution (SRR) debate is proposed to be 04 March 2020. What we are looking for is completion of ‘Budget Bill stage 2’, as the SRR normally follows this.
What we need to look for is whether the minority SNP Government can rely on support for this proposed Budget. This may be in the form of an alliance with another party or as a result of abstentions at the voting stage.