Finance Secretary Derek Mackay has published proposals to reform income tax in Scotland, with plans to introduce a new 19% starter rate of tax, a 21% intermediate rate of tax and increase the higher and top rates of tax to 41% and 46%.
The proposals are contained in the Scottish Government’s Draft Budget 2018-19.
The income tax proposals for 2018-19 are:
- A new Starter Rate of 19% for those earning between £11,850 and £13,850
- A Basic Rate of income tax at 20% for those earning over £13,850
- A new Intermediate Rate of 21% for those earning more than £24,000 — however, as a result of the new Starter Rate, taxpayers earning less than £33,000 “will pay no more in tax for given incomes”
- A Higher Rate of 41% on incomes over £44,273 to £150,000
- A Top Rate of 46% on incomes over £150,000
Mackay said more than two thirds of income taxpayers will pay less tax next year on their current income.
The Scottish Government said the Scottish Fiscal Commission has forecast that the tax changes will generate £164 million of additional revenues in 2018-19 — taking forecast Scottish income tax revenues in 2018-19 to £12.115 billion.
It said: “Following the Scottish Government’s decision in 2017-18 to freeze the higher rate threshold of income tax and the introduction of reformed income tax proposals for 2018-19, income tax policy in Scotland contributes to forecast revenues £366 million above the block grant adjustment to support public spending and investment in the economy in 2018-19.”
The Scottish Government added: “As a result of these changes, and the increase in the personal allowance, all taxpayers earning up to £33,000 will be protected from any increase in tax rates.
“Those earning more than £33,000 will pay only a proportionate amount more.
“A majority of taxpayers (55%) in Scotland will pay marginally less in 2018-19 than they would in the rest of the UK.”
Setting out the Draft Budget for 2018-19, Mackay said: “The Scottish Government has faced continued austerity from the UK Government.
“Over a ten year period, Scotland’s block grant will have been cut by £2.6 billion in real terms and the independent Fraser of Allander Institute has confirmed that we face a £500 million real terms reduction in spending on day-to-day services over the next two years.
“In order to mitigate UK budget cuts, protect our NHS and other public services, support our economy and tackle inequality in our society, we have decided to reform income tax in Scotland.
“In line with the four tests set out in our discussion paper, our reforms will ensure that the vast majority of taxpayers are protected, that income tax becomes more progressive, that revenues are generated for investment in public services and that – coupled with our spending choices – there will be a positive impact on the economy.
“By raising an additional £164 million of revenues to support our investment plans we can deliver on our commitment to the NHS in full, with £400 million of extra spending on health without having to reduce spending on police and fire services, social care or education.
“Our new, fairer, income tax policy will protect the 70% of taxpayers who earn less than £33,000 a year and ensure they pay less tax next year for any given income whilst asking those earning more than £33,000 to pay a proportionate amount more to support our public services.
“Our plans also ensure that over half of taxpayers will pay slightly less in Scotland next year than they would in the rest of the UK, protecting low incomes and supporting the economy.
“These measures combined with our investment in the NHS, the economy, infrastructure, education and essential public services ensure that in the year ahead Scotland will be the fairest taxed part of the UK, providing the best deal for taxpayers.”
The Draft Budget also confirmed that for Residential Land and Building Transaction Tax (LBTT) the Scottish Government will set a new zero rate threshold for first time buyers of £175,000 — taking 80% of first time buyers out of tax altogether.
The residential and non-residential rates and bands for LBTT will remain unchanged.
Mackay added: “As part of our support for housing we are not just investing £3 billion over this parliament to increase the supply of affordable housing, but we will provide more support to help people to own their first home.
“These changes to LBTT mean 80% of First Time buyers will pay no tax at all on the purchase of their first home.”
Publishing the Draft Budget to parliament, Mackay said the programme would:
- Increase spending on the health service by over £400 million – £200 million more than inflation
- Provide £120 million – over and above core education funding – direct to head teachers to help ensure all young people can fulfil their potential
- Lift the one per cent public sector pay cap and provide for up to a three per cent pay rise for NHS staff, police, teachers and others earning up £30,000
- Invest £243 million towards the expansion of free nursery education and childcare
- Protect funding for Police and Fire services including retaining VAT refunds in full
- Deliver a local government finance settlement worth more than £10.5 billion
- Contribute £756 million towards investment of more than £3 billion by 2021 to deliver 50,000 affordable homes
- Allocate more than £4 billion of funding for infrastructure
- Deliver £600 million to ensure every home and business will have access to superfast broadband by 2021
- Deliver the first £70 million of a new £150 million Building Scotland Fund
- Set aside £340 million for initial capitalisation of the Scottish National Investment Bank
- Invest nearly £2.4 billion in colleges, universities, enterprise and skills bodies – including a real terms increase for both college and Higher Education budgets