Scottish Budget and reaction
Mackay: Scots now ‘fairest and lowest taxed in UK’
Derek Mackay: accepted business pleas on rates
Derek Mackay unveiled a package of income tax reforms that will benefit the lower paid and hit higher earners.
The Finance Secretary introduced a new 19p starter rate for the first £2,000 of income above the personal allowance (£11,850 to £13,850), and 21p rate (£24,001 to £44,273).
He froze the 20p rate (£13,851 to £24,000) and hiked the top end rates to 41p (£44,274 to £150,000) and 46p (above £150,000). No one earning below £33,000 will pay more tax and Mr Mackay said 70% of taxpayers will pay less tax.
He said Scotland was not only the “fairest taxed part of the UK but for the majority of taxpayers it is the lowest taxed.”
From April 2018, Scottish income taxpayers earning £50,000, £70,000 and £160,000 will pay, respectively, £655, £855 and £1,874 more in income tax than their UK counterparts.
A five-rate band, as predicted by Daily Business yesterday, marks a historic divergence in tax bands with the rest of the UK.
Critics said the Budget punished those with aspiration, will see a million Scots pay more tax than those in England, and one analyst said the new 19p band would produce a maximum benefit of just £20 a year.
Mr Mackay gave a boost to companies by accepting pleas for business rates rises to be kept to a lower measure of inflation.
The Finance Secretary said rises would be linked to the consumer prices index rather than the retail prices index as recommended by the Barclay review.
He said he was accepting almost all the recommendations in the review apart from some charity relief which means private schools will forced to pay rates. There would be a £96m benefit to business.
The proposed Scottish National Investment Bank will be established with £340 million capital.
Mr Mackay said his Budget aimed to build a fairer society in the most challenging circumstances.
“Austerity and uncertainty is damaging the UK economy,” he said.
However, he said that in spite of these challenges Scotland has largely closed the productivity gap with the rest of the UK.
He argued that the Scottish government must continue to make the case for a “common sense solution” to Brexit that keeps the UK in the single market and customs union.
He dismissed the extra funding through “financial transactions” coming to Holyrood from Westminster and said the Scottish government would use its own resources to invest in public services.
“You cannot spend financial transactions on teachers, nurses and police,” he said to applause from the SNP benches.
There will be £4 billion of infrastructure investment and a £600m commitment to deliver superfast broadband across the country.
The public sector pay cap is lifted from 1% to introduce a progressive cap.
Mr Mackay also announced a new relief for first-time home buyers with no land and buildings transaction tax due on property up to £175,000. This will mean 80% of first time buyers will pay no tax.
Growth projections were also released by the Scottish Fiscal Commission, which show low levels of growth for the next five years. GDP will increase by 0.7%, 0.9%, 0.6%, 0.9% and 1.1%.
Reaction from business and opposition parties
Income tax change, marriage allowance
David Eiser, head of Fiscal analysis at the Fraser of Allander Institute, said: “In revenue raising terms, the policy announcements today are relatively modest adding less than 1% to the Scottish resource budget. But combined with changes announced last year, the Scottish income tax schedule now looks quite different from that in the rest of the UK.
“Alongside increases in the higher and additional rate for income tax, the announcement of a new starting rate of 19% will have surprised many. That being said, the maximum gain to any taxpayer from this lower rate is just £20 per annum.”
Tax professionals have cautioned that plans to restructure Scottish income tax will introduce additional complexities for Scottish taxpayers, while warning that the measures should not be considered in isolation from the wider UK tax and benefits regime.
The Chartered Institute of Taxation warned that the proposals could see some middle-income earners paying a higher marginal rate of tax and National Insurance (NI) than those on higher incomes because of the misalignment between income tax and the Upper Earnings Limit (UEL) of National Insurance contributions.
Furthermore, the CIOT said that the decision to introduce a new ‘starter’ rate of tax could pose complications for some people in receipt of benefits, while noting that the creation of an ‘intermediate’ rate could have implications for people in receipt of Marriage Allowance.
Moira Kelly, chairman of the CIOT Scottish technical committee, said: “Complexity is the price Scots will pay for exercising our devolved powers over income tax.
“Introducing new rates and bands of income tax cannot be considered in isolation from the wider UK regime.
“We are concerned that today’s proposals have the potential to increase both the costs and complexity of administering Scottish income tax as well as throwing into the mix some interesting anomalies.
“The options set out could – for example – see someone earning between £44,274 and £46,350 per year paying a marginal rate of tax of 53% (income tax and national insurance) compared with a lower marginal rate of 43% for those earning between £46,351 and £100,000.
“Introducing a new ‘intermediate’ rate raises questions on the eligibility of certain Scottish taxpayers currently receiving Marriage Allowance because they pay the basic rate of income tax but who, from next April, will pay the new 21p rate. This could see Scottish taxpayers earning more than £24,000 being unable to claim this allowance.
“And of course, we can’t rule out that an increase in the higher rate of income tax will prompt some who are able to – such as self-employed businesses – to opt out of Scottish income tax in favour of a lower UK wide rate of corporation tax.
“The nature of our tax system already makes it very difficult to educate the public over what they pay and when they pay it without introducing additional complexities.
“Moving forward, this debate needs to be more than just what Scottish income tax we will pay and when, but also how this interacts with the wider UK tax regime.”
Stephen Hay, tax partner at RSM said the tax bands will raise £164m more than the current system. “However, this this lower than the decrease in block grant funding at £200m and a pretty small sum in comparison to the growing deficit which sits at £12bn.
“In addition, the changes bring another level of complexity for HMRC to process Scottish taxes and the Scottish Government will have to foot the bill for the additional administration so the net gain will be reduced.”
Susannah Simpson: full first time buyer relief unclear
Property tax changes
Susannah Simpson, partner and head of private business at PwC, said: “The Scottish Budget announcement to provide LBTT relief for first time buyers on purchases of Scottish residential property up to £175,000 will provide a saving from LBTT of up to £600. However, it remains unclear from the announcement whether first time buyers purchasing properties costing in excess of £175,000 will benefit from the relief.
“The UK Government’s announcement in last month’s Autumn Budget provided relief for first time buyers on the first £300,000 on purchases of residential property up to £500,000; this provided a saving of up to £5,000 for first time buyers of residential property elsewhere in the UK.
“No other changes were announced to the LBTT bands or rates meaning that purchases of residential property in Scotland costing over £333,000 suffer a higher LBTT charge than the equivalent SDLT. For example purchases of a property costing £350,000/£450,000 will be hit by an additional £850/£5,850 transaction tax bill in Scotland compared to equivalent purchases elsewhere in the UK.”
Stephen Hay, tax partner at RSM, said: “The finance secretary followed the UK chancellor’s lead and offered first time buyers a new relief on LBTT – introducing a nil rate band for properties up to £175,000 which would deliver around a £600 savings.
“However, it didn’t go far enough to consider high cost areas, such as Edinburgh, or to address the calls from industry to increase the 10 per cent threshold on home purchases between £325,000 and £500,000– missing an opportunity to stimulate the top end of the property market.”
Alan Cumming, national estate agency director, Aberdein Considine said: “The cabinet secretary has gone some way to closing the gap between first time buyers in England and Scotland, but some will feel he hasn’t taken the necessary steps to address the difficulties of those struggling to buy their first home in more expensive parts of the country.
“It is disappointing that he has chosen not to examine the middle and upper bands of LBTT, which have caused fundamental market interference in Scotland, particularly in the £500,000-plus price bracket where significant sums become due.
“Due to the bottleneck being created at the top end of the market, the current structure is expected to raise tens of millions less than forecast over the life of the current parliament. This was a missed chance for Mr Mackay to address that.”
Effect of tax changes on pensions
Steven Cameron, pensions director at Aegon said: “For those earning above £33,000 their income tax will go up from next April and their take-home pay will reduce. This signals the Scottish Government is making greater use of its devolved tax raising powers and means an increasing number of Scottish taxpayers are paying higher income tax than those earning the same elsewhere in the UK.
“The introduction of additional tax bands creates uncertainty about how these will be applied to pension tax relief. Currently, pension tax relief means the cost to a 20% taxpayer of £100 pension contribution is £80, and £60 for a 40% taxpayer. For personal pension schemes, pension providers currently collect contributions net of basic rate tax, which remains at 20% across the UK, with individuals claiming extra relief through tax returns.
“We now need urgent clarification that those paying 21%, 41% or 46% will now be entitled to more relief. But perhaps even more importantly, the Scottish Government must make clear that those paying 19% won’t have to pay something back to the tax man.”
Rachel Vahey, product technical manager at Nucleus, said: “Although a lower rate of tax of 19% has been introduced for initial earnings above the personal allowance, we would assume Scottish pension scheme members will continue to get 20% relief on all their pension contributions.
“Introducing varying rates of tax relief between different parts of the UK may open up previous discussions on the future of pensions tax relief, and whether to sever the link between income tax and pensions altogether.”
Bryan Buchan: proposals beneficial to industry (photo by Terry Murden)
Impact on industry
Bryan Buchan, CEO of Scottish Engineering, said: “Taken at face value, the Scottish Budget proposals do appear beneficial to industry in some measure.
“The most appealing figure presented was the 70% increase in business research and development from £22m to £37m. If this can be accessed readily by organisations as required, then this will significantly benefit companies as they grow and innovate.
“The start of construction of the National Manufacturing Institute next year was already announced by the First Minister earlier this week, and it is to be hoped that this will provide the much-needed stimulus for growth in advanced manufacturing. We still trail the rest of the UK on growth and productivity, but we should be comparing our economy with Germany and France, not the UK, which trails them by some significant margin.
“The increases in income tax will take some time to unravel, and it will be interesting to see the mathematics which corelate these change to the public sector expenditure.”
Andy Willox, FSB’s Scottish policy convener, said: “We wanted to see a Scottish Government budget which offered firms a little ballast in choppy market and political conditions. Instead the Scottish Government has chosen to steer us into uncharted economic waters.
“A majority of those in business in Scotland were against changes to the income tax regime. However, the Cabinet Secretary underlined that his tax changes were designed to cause minimum economic disruption. Only time will tell what the wider impact will be, but our members have a real concern about the effect of these changes on household spending power.
Business rates reform, Investment Bank
“On rates, we’re pleased to see Ministers seize upon the most sensible recommendations of the Barclay review. Moving to a different inflation measure will mean a smaller increase to many firms’ bills. Further, the introduction of a new business accelerator relief is a clever move that deserves plaudits. By far the most valuable commitment in the budget for Scottish smaller firms is the retention of the Small Business Bonus rate relief.
“It is great to see the Scottish Government allocate funding to fulfil their manifesto commitment to address Scotland’s patchy digital infrastructure. We need to see governments in Edinburgh and London work together to address broadband and mobile issues north of the border.
“Other initiatives – like cash for the Scottish National Investment Bank and support for the enterprise and skills agencies – won’t mean a lot to many ordinary businesses. Ministers have to ensure that these bodies and initiatives deliver for local economies and the wider business community.”
David Lonsdale: positive news (photo by Terry Murden)
David Lonsdale, director of the Scottish Retail Consortium, said: “Retailers will welcome the Finance Secretary’s decision to limit future rises in the business rates poundage to CPI, rather than RPI. This is positive news that will shave £5 million off the rates bills of hard-pressed retailers next year.”
Schools lose charity relief eligibility
Jim Burberry, partner at RSM in Scotland said: “Mr Mackay will remove the charity relief eligibility for independent schools from 2020/2021, excluding special schools.
“This measure is estimated to bring in an extra £5m revenue per annum to the Scottish Government. The actual increased cost to each school will vary depending on their estate but for some schools this could mean a six figure increase to their costs which is a significant funding void to fill.
“Many schools already operate within thin margins and if additional costs cannot be absorbed schools many will have no choice but to pass on the increase on to the parents.
“This is not necessarily new news as the Barclays report was published back in August, so the schools have had a chance to consider its recommendations and to prepare themselves and their stakeholders in anticipation of this announcement.
“The proposed implementation in 2020/2021 gives the schools and their parents, some forewarning to consider their budgets and adjust their cashflow accordingly.”
Boost for the arts
The Budget commits £248.7m to culture, tourism and major events in 2018-19, a 10% increase of £22.5m.
Ben Macpherson SNP MSP said: “This budget will maintain provision for Creative Scotland over the next three years and invest a further £6.6m to help protect the arts in the face of declining Lottery receipts, as well as providing £10m for a dedicated screen unit.”
A summary of the statement:
- £96 million of extra support to deliver the most attractive business rates package in UK with the increase to the rates poundage capped at CPI inflation
- A 64% increase of £270 million in the Economy, Jobs and Fair Work budget as part of a total investment of £2.4 billion in enterprise and skills
- A 70% increase in investment in business Research & Development
- £18 million as part of a £65 million package of investment for the National Manufacturing Institute to make Scotland a global leader in advanced manufacturing
- Establishing a new £150 million Building Scotland Fund to unlock new house building, develop new low carbon commercial property and support research and development
- Setting aside resources of £340 million to provide initial capitalisation for the Scottish National Investment Bank
- Driving regional economic growth by more than doubling our investment in city region deals
- 70% of taxpayers paying less in income tax next year, assuming their income doesn’t change, protecting consumer spending, while still raising additional revenues.
The Draft Budget also proposes a programme of infrastructure investment for 2018-19 of more than £4 billion, in line with the Programme for Government commitment to invest £20 billion over the life of this parliament.
- Contributing £756 million towards investment of more than £3 billion by 2021 to deliver 50,000 affordable homes generating up to 14,000 FTE jobs
- Beginning the procurement of Scotland’s £600 million universal superfast broadband programme to be delivered over the next four years
- Investing £60 million in Low Carbon Innovation Fund to deliver innovative low carbon energy infrastructure solutions including for electric vehicles
- Investing £1.2 billion in our transport infrastructure, including key road projects and further electrification of the rail network.
Mr Mackay said: “This budget backs Scotland’s businesses to deliver the growth, innovation and new employment opportunities that Scotland’s economy needs to thrive in the 21st Century.
“Scottish business will benefit hugely from our reforms to business rates, including a new growth accelerator and our decision to cap the rise in business rates at CPI, together saving firms £96 million in the next year and helping make Scotland the most attractive part of the UK to do business in.
“We will continue to fund the most competitive relief package available anywhere in the UK, worth around £720 million next year – a record amount.
“We are maintaining the expanded Small Business Bonus Scheme which helps many tens of thousands of small and medium-sized businesses and creating a new £4 million fund to back our entrepreneurs to get started and to grow.
“We are boosting levels of innovation, with a 70% increase in investment in research and development, support for new low carbon technologies, a new £150 million Building Scotland Fund and support for Scotland’s National Manufacturing Institute.
“And our Enterprise and Skills network will receive a record £2.4 billion to invest in supporting Scotland’s economy with additional funding to establish an economic agency for the South of Scotland.
“Our £4 billion commitment to new infrastructure investment next year will support 50,000 new homes, new roads and railways, electric vehicles and the delivery of 100% superfast broadband to every corner of Scotland.
“And to support future investment in Scotland’s economy we will set aside £340 million in future years to capitalise a new Scottish National Investment Bank.
“This budget delivers a growth package for Scotland that is a good for Scottish businesses, good for investment, good for taxpayers and good for Scotland’s future.”
Scottish Liberal Democrat leader Willie Rennie said: “The budget is a missed opportunity. It does not do enough to meet the long term needs in the economy. We’ll need to scrutinise the tax proposals but the government seem to have introduced a modest tax increase. That’s an approach that we advocated at the election and the SNP opposed.
“We have a set of announcements that pay lip service to the challenges that Scotland faces.
“What’s more, while the lifting of the public sector pay cap will be welcomed, it is unfunded. For local authorities this will impose additional costs and inevitably service cuts at the same time as the SNP Government have cut local authority budgets.”
Scottish Labour said: “Derek Mackay’s budget has delivered a real terms cut of £135m from day to day spending for local councils.
“That is on top of £545m the Convention of Scottish Local Authorities (Cosla) say is needed simply to maintain current service levels.
“As a result, local services will be nearly £700million worse off in the next financial year.”
The Scottish Tories said nearly half of Scottish workers will pay more than if they lived in the rest of the UK.
The new rate of 21p for those earning between £24,000 and £44,000 means, once a worker hits £26,000, they will be worse off than their equivalents in England, Wales and Northern Ireland under these SNP plans, said the party.
It is estimated around 1.16 million workers will be hit be these changes, a total of 45%.
The Tories said First Minister Nicola Sturgeon claimed the tipping point would be at £33,000, hitting 70% of workers.
But that sum takes into account the Personal Allowance introduced by the UK Government to help lower earners, said the Tories.
Scottish Conservative shadow finance secretary Murdo Fraser accused the SNP of imposing “a tax on aspiration, a punishment for daring to work hard, and a direct breach of the promise made by the SNP in its election manifesto.”
“The message from this budget is clear: don’t be ambitious, don’t be hard working, and don’t be successful in the SNP’s Scotland.
“Instead of prioritising economic growth, the SNP has decided to impose higher Nat Taxes on the hard working people of Scotland.
“Large and small businesses across Scotland have warned the SNP that this will cause long term damage to the economy.
“It’s the SNP’s responsibility to grow the economy, but it is abjectly failing to do so.”