The task of balancing Scotland's budget was never going to be an easy one for Deputy First Minister, John Swinney. 

Since the 2022-23 Budget was presented (December 2021), the UK economic situation has deteriorated, with high inflation eroding living standards, together with eroding the value of the Scottish Government’s spending power. Despite emergency cuts to the budget there was still a significant deficit to fill, leaving few tools in the box, so it was not a surprise that today saw further flexing of those devolved tax powers. The recent report on the Scottish Budget issued by the Fraser of Allander Research Institute, suggested the funds available were likely to be £1bn less in real terms than was the case when spending decisions were made. Announcements by the UK Chancellor on 17 November, whilst not alleviating the current pressures on the 2022/23 budget, did provide surplus funding to offset the inflationary impact for the 2023/24 and 2024/25 tax years. However, the Scottish Budget remains squeezed, and John Swinney has therefore announced a range of tax rises to cover, amongst other things, increases to the health budget and inflationary increases in benefits administered by the Scottish Government. 

We've covered below, the key announcements that impact our clients. Scroll to read our analysis or click on the headings to navigate to your area of interest:

Scottish Rate of Income Tax

Land and Buildings Transaction Tax and Additional Dwelling Supplement

Non-Domestic Rates or Business Rates

Energy - Delivering Net Zero

Scottish Rate of Income Tax (SRIT)

The Scottish Budget announcement saw further divergence between Scotland and the rest of the UK as the Scottish Government further exercised its devolved tax powers. It was not surprising that the Scottish Government followed suit on most of the UK budget tax decisions, to include freezing income tax thresholds and the reduction of the top rate income tax threshold from £150,000 down to £125,140 from 6 April 2023, which fits with the Scottish Government’s aspiration for progressive tax policy change. Such a move may have carried more political risk had this change not been initiated in the UK Budget. It is estimated by the Fraser of Allander Institute that this reduction in the top rate threshold, down to just over £125,000, will bring a further 12,000 taxpayers into the top rate of income tax in Scotland. In addition to reducing the top rate threshold, the tax rate was also increased by a further 1% to 47% from 6 April 2023.  

In addition, all taxpayers earning more than £43,662 will see their tax rate increase. The higher rate Income Tax band (between £43,663 to £125,470) will increase from 41% to 42%.

To illustrate this with some examples, from 6 April 2023 a Scottish tax resident individual earning: 

  • £50,270 will pay £66 more in tax than in 2022/23 tax year
  • £125,470 will pay £940 more in tax than in 2022/23 tax year, and 
  • £150,000 will pay £2,432 more in tax than in 2022/23. 

The increases in Scottish tax rates has created further divergence between Scotland and the rest of the UK. This means that the tax bill for many Scottish taxpayers on their earned income and non-savings income (over which the Scottish Government has devolved tax powers) will be substantially higher than their English counterparts. For example, an individual earning: 

  • £50,270 will pay £1,611 more in tax in Scotland than in the rest of the UK,  
  • £125,140 will pay £3,360 more in tax than in the rest of the UK, and 
  • £150,000 will pay £3,857 more in tax than the rest of the UK. 

This is particularly painful for middle earners, as the higher rate threshold kicks in at £43,663 in Scotland, but £50,270 in England. This substantially increases the tax bill for a Scottish taxpayer earning around the £50,000 mark. When taking into consideration the interaction between Scottish Income Tax rates and UK-wide National Insurance rates:

  • In Scotland, employment income between £43,663 and £50,270 is taxed at an eye-watering 54%, being 42% Income Tax and 12% National Insurance.  
  • Whereas in the rest of the UK, employment income is taxed at 32% below £50,270 (being 12% National Insurance and 20% Income Tax), which then increases to 42% above £50,270 (being 2% National Insurance and 40% Income Tax). 

Given the increased divergence, it will be interesting to see any behavioural responses amongst top earners as Scottish taxes continue to drift from the rest of the UK. With increased flexibility in working from home, there are fewer barriers to individuals moving to others parts of the UK where the income tax burden is less. The higher cost of income tax in Scotland may also impact on Scotland’s ability to attract the best talent, with a declining working population there is a risk these tax increases could erode Scotland’s income tax base over the longer term. 

Scotland is highly dependent on a small amount of high earners for the majority of its Income Tax receipts. Based on HMRC data released for the 2021 tax year, there are circa 2.5m taxpayers (57% of the adult population). However only circa 375,000 taxpayers earn more than £43,663, but this small group of taxpayers pay 60% of the income tax collected in Scotland and the 14,700 taxpayers earning more than £150,000 pay over 15% of the Scottish Income Tax. Today’s announcements increase the tax burden on this small group of taxpayers. 

Finally, it's important to note that increases to the Higher Rate and Additional Rate bands don't impact on dividend income or savings income as these rates are set by UK Government. 

Land and Buildings Transaction Tax and Additional Dwelling Supplement

No changes were made to the main Land and Buildings Transaction Tax (LBTT) rates and bands of residential property. However the Additional Dwelling Supplement (ADS) paid when you acquire a second property will increase from 4% to 6%, a 50% rate rise, with effect from 16 December 2022.

There are no changes to the LBTT rates for commercial properties or leases.

ADS as mentioned is payable when you purchase a second home, but the ADS is not payable on all purchases of second homes, as relief may be available in certain circumstances. In addition, where it is payable, it can be reclaimed if you are replacing your main residence (other conditions also need to be met). The impact of the increased ADS is shown in the table below:

ConsiderationLBTTADS @ 4% (pre 16 December 2022)TotalLBTTADS @ 6% (post 16 December 2022TotalOverall difference following ADS increase

As you will note from the table above, the ADS is a significant cost. The rules are complex, and it is advisable to obtain tax advice to ensure you understand how the rules apply to your own position and whether or not you can manage this additional tax charge.

Scottish Landfill Tax - rates 

The standard rate of Scottish Landfill Tax (SLfT) moves to £102.10 per tonne and the lower rate of SLfT to £3.25 per tonne in 2023/24, maintaining consistency with UK Landfill Tax, increases. These rates are effective from 1 April 2023.  

The credit rate for the Scottish Landfill Communities Fund for 2023/24 will remain at a maximum of 5.6% of an operator’s tax liability.  

Non-Domestic Rates or Business Rates

Non-domestic rates (NDR), or “business rates”, are administered and collected by local authorities, who retain all the NDR revenue but national NDR tax rates and reliefs are confirmed annually by the Scottish Government. The amount of tax due is based on the rateable value of the property multiplied by the Basic Property Rate (‘poundage’), or the Intermediate, or Higher Property Rate, where relevant, minus any reliefs to which the property is entitled.  

The next non-domestic property revaluation will take effect on 1 April 2023, based on rental values as at 1 April 2022 and draft values were published on 30 November 2022. This will also see the implementation of the recommendation to move to three-yearly revaluations and a one-year tone date.  

The Basic Property Rate/ poundage is frozen at 49.8p. The Intermediate and Higher Property Rates which are levied on properties with higher rateable values will increase to 51.1p and 52.4p respectively. The threshold for the Higher rate is now £100,000 (previously £95,000).  Overall this is expected to save ratepayers £308 million compared to an inflationary increase.  

Non-domestic rates – typeRate
Basic property rate (“poundage”) 49.8p
Intermediate property rate (rateable values between £50,001 and £100,000) 51.1p
Higher property value (rateable value over £100,000) 52.4p

Available NDR Reliefs

The Scottish Government have updated the Business Growth Accelerator relief to account for the revaluation, and properties in receipt of this relief on 31 March 2023, will continue to be eligible for an equivalent percentage of relief on the new rateable value for the remaining duration of the relief.  

To encourage regeneration, including in town centres, the Scottish Government are expanding Fresh Start relief by raising the rateable value threshold at which properties qualify for the relief from £95,000 to 100,000. Properties already in receipt of Fresh Start relief on 31 March 2023 will also continue receiving relief for the remaining duration of the relief award regardless of whether the new rateable value is above the new qualifying threshold.  

The Small Business Bonus Scheme (SBBS) has been reformed and eligibility extended, so that 100,000 properties are taken out of rates altogether.  100% relief will be available for properties with a rateable value of up to £12,000 and the upper rateable value for individual properties to qualify for SBBS relief will be extended from £18,000 to £20,000. Relief is to be tapered for properties with a rateable value between £12,001 and £20,000. Car parks, car spaces, advertisements and betting shops will be excluded from eligibility for SBBS from 1 April 2023. 

The Scottish Government will offer a Small Business Transitional Relief to ensure that properties that lose SBBS or Rural rates relief eligibility, do so in a phased manner. For those losing or seeing a reduction in these reliefs (including due to the above exclusions introduced for SBBS relief) on 1 April 2023, the maximum increase in the rates liability relative to 31 March 2023 will be capped at £600 in 2023/24, rising to £1,200 in 2024/25 and £1,800 in 2025/26. This will protect an estimated 19,000 properties who will lose some or all their eligibility for SBBS relief or Rural relief.   

There will also be a Revaluation Transitional Relief introduced to protect those most affected by the move to a three year valuation cycle.  The rates increases will also be capped up to the next revaluation in 2026.  This relief will ensure that the gross bills of an estimated 84,000 properties are lower in 2023/24 than they otherwise would have been. 

To support the attainment of the Scottish Government’s Net Zero targets, and incentivise investment in renewables, the Scottish Government will introduce a non-domestic rating exemption for prescribed plant and machinery used in onsite renewable energy generation and storage in Scotland from 1 April 2023 until 31 March 2035.

Day Nursery Relief, which was due to end on 30 June 2023, has been extended indefinitely.  Enterprise Areas relief will be extended by one year to 31 March 2024.  Empty Property Relief is being devolved to local authorities on 1 April 2023.   

All the other existing NDR reliefs will be maintained in 2023/24.  

In total, NDR reliefs are forecast to save non-domestic ratepayers £744 million in 2023/24.

Devolved Social Security benefits 

This it to be increased in April 2023 by the September Consumer Price Index of 10.1% at a cost of £428 million.

Air Departure Tax 

Air Departure Tax will be introduced when a solution to the Highlands and Islands exemption issue has been found.  

Aggregates Levy 

The Scottish Government will continue to consult and engage with stakeholders to help inform work going forward. 

Delivering Net Zero

Today’s announcements further commit the Scottish Government to delivering a stronger, fairer and greener economy. Renewable energy is front and centre of delivering the Budget ambitions. Deployment needs to be accelerated to keep the pace of energy transition up.

A summary of the key announcements is set out below, which committed to delivering the announcements in the recent programme for government and climate change update with an allocation of £2 billion across the next five years: 

  • Additional £244 million of funding to Scottish National Investment Bank to continue to invest in Scottish businesses, projects and communities. 
  • Continue with the private sector to deliver £60 million Electric Vehicle (EV) infrastructure fund to expand Scotland’s EV charging. 
  • £15 million committed to looking at removing peak time rail fares as part of the Fair Fares Review. 
  • £197 million invested in active and sustainable travel, including increasing access to cycling and supporting behavioural change, this is part of the Scottish Government’s overall £320 million commitment to active travel by 2024/25. 
  • £50 million invested in the Just Transition Fund for the North East and Moray, to help diversify that economy away from carbon-intensive industries. 
  • £1.4 billion to maintain, improve and decarbonise Scotland’s rail network. 
  • Investing over £366 million in delivering the Heat in Buildings Strategy which includes developing low carbon infrastructure projects such as heat networks and measures to tackle fuel poverty. Part of a wider £1.8 billion commitment over the course of Scottish Parliament to accelerate deployment of heat and energy efficiency measures to decarbonise over a million Scottish homes by 2030. 
  • Using the non-domestic rates regime to further incentivise investment in renewables through the introduction of new prescribed plant and machinery exemptions for onsite renewable energy generation and storage from 1 April 2023 to 31 March 2035. 
  • Committing £44 million for National Test Programme, Agricultural Reform Programme and Agricultural Transformation Fund to support the industry to achieve statutory emission targets. 
  • Support lifeline ferry services with an additional £122 million of capital investment in new vessels and upgraded infrastructure. 
  • Investing £26 million in peatland restoration as part of the £250 million, 10 year spending package. 
  • Invest over £77 million to support the scaling-up of activity to meet the annual target of 18,000 hectares of woodland creation target by 2024/25. 
  • Deliver the £34 million Scottish Industrial Energy Transformation Fund and the recently launched £26 million Low Carbon Manufacturing Challenge Fund. These initiatives leveraging co-investment from manufacturing businesses that will support their decarbonisation. 
  • Enhanced policy packages will be set out in the Scottish Government’s upcoming draft Climate Change Plan and new Just Transition Plans by the end of 2023. 

Tech & Entrepreneurs

It was announced £42 million will be invested over the next five years to boost entrepreneurship by supporting start-ups in Scotland through the national network of Techscalers and pre-scalers.