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Who decides what?

Income tax powers are partially devolved to the Scottish Parliament. The Scottish Parliament can set income tax rates and bands, but decisions on the personal allowance are made at Westminster. This means that the UK Government’s plans to increase the personal allowance to £12,500 from April 2019, as announced in the Autumn Budget 2018, will affect Scottish taxpayers. However, the plans to increase the higher rate threshold to £50,000 that were announced at the same time will not affect Scottish taxpayers, as this is for the Scottish Parliament to decide.

The current position…

At the moment, Scottish income tax bands and rates already differ from those in the rest of the UK (rUK), as shown in Tables 1 and 2 below.

Table 1: Scottish tax bands and thresholds, 2018-19

Bands Band name Rate (%) Over £11,850* – £13,850 Starter 19 Over £13,850 – £24,000 Basic 20 Over £24,000 – £43,430 Intermediate 21 Over £43,430 – £150,000** Higher 41 Above £150,000** Top 46

* Assumes individuals are in receipt of the standard UK personal allowance (£11,850 in 2018-19)

** Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over £100,000

Table 2: rUK tax bands and thresholds, 2018-19

Bands Band name Rate (%) Over £11,850* – £46,350 Basic 20 Over £46,350 – £150,000** Higher 40 Above £150,000** Additional 45

* Assumes individuals are in receipt of the standard UK personal allowance (£11,850 in 2018-19)

** Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over £100,000

The UK Budget announcement

From April 2019, income tax bands and thresholds in the rest of the UK will be as shown in Table 3.

Table 3: rUK tax bands and thresholds, 2019-20

Bands Band name Rate (%) Over £12,500* – £50,000 Basic 20 Over £50,000 – £150,000** Higher 40 Above £150,000** Additional 45

* Assumes individuals are in receipt of the standard UK personal allowance (£12,500 in 2019-20)

** Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over £100,000

For Scotland, the personal allowance will also rise to £12,500 in April 2019. However, proposals for other rates and bands will be set out in the Scottish budget, on 12 December 2018.

So what could this mean for Scottish taxpayers?

The increase in the personal allowance will benefit most taxpayers by around £70 per year. Beyond this, everything will depend on what the Scottish Government proposes in its budget. The indications are that the Scottish Government is unlikely to raise the higher rate threshold to the same level as in the rUK. In response to a question about the Scottish Government’s position on the higher rate threshold following the UK budget, the Cabinet Secretary for Finance, Economy and Fair Work commented:

“The Tories have once again chosen tax cuts for the richest people in society, but we will choose a fairer and more progressive path.”

Until the Scottish budget on 12 December, we won’t know what this means and there are many options that the Scottish Government might pursue. One option could be to increase all income tax thresholds in line with inflation, keeping the same five tax rates that are currently in place. If this approach was taken, the Scottish income tax policy from April 2019 onwards would be as shown in Table 4.

Table 4: Scottish tax policy in 2019-20 if all thresholds rise in line with inflation

Bands Rate Over £12,500* – £14,182 19 Over £14,182 – £24,576 20 Over £24,576 – £44,472 21 Over £44,472 – £150,000** 41 Above £150,000** 46

Note: tax thresholds increased in line with September 2018 Consumer Prices Index (2.4%)

* Assumes individuals are in receipt of the standard UK personal allowance (£12,500 in 2019-20)

** Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over £100,000

If the Scottish Government adopted such a policy, those earning up to £26,250 would pay slightly less income tax in Scotland than in the rest of the UK. However, for all those earning more than this level, their income tax bill in Scotland would be higher than in the rest of the UK. Income tax at various levels of earning under this hypothetical scenario is shown in Table 5.

Table 5: Potential differences between Scottish and rUK income tax, 2019‑20

Scotland £ per year rUK £ per year Difference £ per year 15,000 483 500 -17 20,000 1,483 1,500 -17 25,000 2,487 2,500 -13 30,000 3,537 3,500 37 35,000 4,587 4,500 87 40,000 5,637 5,500 137 45,000 6,793 6,500 293 50,000 8,843 7,500 1,343 60,000 12,943 11,500 1,443 70,000 17,043 15,500 1,543 80,000 21,143 19,500 1,643 90,000 25,243 23,500 1,743 100,000 29,343 27,500 1,843

Note: assumes indexation of all Scottish tax thresholds in 2019-20

Note that this is a hypothetical scenario for Scotland and the actual differentials will not be known until the Scottish budget is published on 12 December. Also, these calculations only reflect income tax. The UK budget also made changes to National Insurance Contributions which will apply in Scotland but are not included above.

What are the implications for the Scottish budget?

If the Scottish Government decides not to replicate the UK Government’s proposals for the higher rate threshold, but instead decides to uprate in line with inflation, then there will be more money for the Scottish Government, as tax revenues will be higher than if the UK policy was implemented.

SPICe estimates show that, if the Scottish Government uprates all income tax thresholds in line with inflation, rather than increasing the higher rate threshold to £50,000 (and uprating other thresholds), then tax revenues would be an estimated £340 million higher (before accounting for any changes in behaviour that might result). If the Scottish Government chooses not to uprate any tax thresholds in line with inflation, the gap widens, because raising tax thresholds has a cost for the Scottish Government in reduced tax revenues. If none of the Scottish tax thresholds are increased, then Scottish tax revenues would be £410 million higher than they would be with the rUK higher rate threshold (again, before any behavioural changes are taken into account). So, by choosing a different income tax policy, the Scottish Government can boost tax revenues, but Scottish taxpayers will face higher income tax bills than in the rest of the UK.

Nicola Hudson, Senior Researcher, Financial Scrutiny Unit

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