Scotland’s Finance Secretary, Derek Mackay, delivered a Scottish Budget with the main objective to “protect what matters most.” He outlined his tax and spending plans for the country for 2019-20 under the shadow of what he described as “the UK Government’s chaotic approach to Brexit”, with the caveat that a “no deal” Brexit could affect the Scottish Government's spending plans.

While most taxes will remain the same, Mr Mackay announced a freeze on the threshold for the higher rate of income tax to “ensure Scotland’s health and care services get the full budget increase they deserve.”

Below, our team of experts summarise the key changes which are, of course, subject to Scottish Parliamentary approval over the coming weeks.

Income tax rates

There are no changes to the tax rates introduced in 2018/19 and changes only to the 19% and 20% and 21% tax bands. The proposed new rates and bands for 2019/20 are as follows:

*Assumes individuals are in receipt of the standard UK personal allowance. 

• The personal allowance is set by the UK Government.
• The Scottish rates of income tax apply to earned income (e.g. employment/self-employment/pension income) and rental income but not savings income (e.g. dividends and interest). Savings income is taxed at UK rates using UK income tax bands.
• Scottish taxpayers with income less than £26,990 will pay £20 less tax then those in the rest of the UK.
• Anyone earning more than £26,990 is paying more tax in 2019/20 tax year than if they lived elsewhere in the UK.
• For 2019/20 Scottish taxpayers will start paying higher rate tax at 41% on income over £43,430. The rest of UK taxpayers will start to pay higher rate tax at 40% on income over £50,000. 

So who are the winners and losers?

So who are the winners and losers? Overall most taxpayers will be better off in 2019/20 under the new increased personal allowance, rates and bands applied by the UK and Scottish Governments in comparison to 2018/19.

Most of this is because of the increase in the personal allowance and lower earners in Scotland benefit from the increased starter and basic rate rates introduced in the Scottish Budget. For those with income over £26,990, Scottish taxpayers will benefit less as a consequence of tax bands not increasing by as much as in the rest of the UK.

• The interaction of UK NIC rates and income tax bands has a further impact on this.  Employee NIC rates reduce from 12% to 2% on income above the UK higher rate threshold.  A Scottish taxpayer will therefore pay income tax at 41% and employee’s NIC at 12% on income between £43,430 and £50,000 – an effective rate of 53%. A RoUK taxpayer will pay tax and NIC at a combined effective rate of 32% on the same income.

Property

Two key changes to Land and Buildings Transaction Tax (LBTT) were announced in the draft Scottish Budget:

1. The Additional Dwelling Supplement (ADS) rate will increase from 3% to 4%.
2. The LBTT rates for non-residential transactions will change. The lower rate will reduce from 3% to 1% and the upper rate will increase from 4.5% to 5%. The starting threshold of the upper rate will reduce from £350,000 to £250,000.

If approved by the Scottish Parliament the changes will take effect from 25 January 2019. The changes will not apply to contracts entered into prior to 12 December 2018 that don't complete until 25 January 2019 or beyond. The rates and bands for residential property transactions will remain the same.

The Scottish Government also announced plans to introduce two new LBTT reliefs in 2019 being a relief for the initial transfer of properties into a Property Authorised Investment Fund or Co-owned Authorised Contractual Scheme (CoACS) and a relief for when units in CoACS are exchanged.

ADS

The ADS is payable on the purchase of additional residential properties in Scotland with a value of £40,000 or more (e.g. buy to let properties and second homes) and is payable on top of the standard LBTT charge. The ADS is also payable when companies and certain other entities buy residential property.

By way of example, a homeowner buying a second residential property as a buy to let for £200,000 would currently pay £7,100 of LBTT made up of a core LBTT charge of £1,100 at residential rates and ADS of £6,000. From the 25 January 2019, the total amount of LBTT payable will increase to £9,100. The core LBTT charge of £1,100 would remain the same. However, the change in the rate of ADS from 3% to 4% would result in £8,000 of ADS being payable, an increase of £2,000. There may therefore be an incentive where possible to complete property transactions prior to 25 January 2019 to save on the total ADS payable.  

Approximately 1 in 5 of all LBTT returns filed result in a liability to pay ADS and the change is expected to generate an extra £25.4 million in revenue for the Scottish Government in 2019-20. 

Non-residential rates

The proposed changes to non-residential rates are highlighted in the tables below:

1. Current non-residential rates

2. Proposed non-residential rates from 25 January 2019

The impact of the changes on the purchase of a non-residential land or property is illustrated in the table below:

As the above table shows, following the changes of the purchase price of the non-residential land or property is:

• Less than £350,000 - there will be an LBTT saving
• £350,000 – the amount of LBTT payable will be the same
• More than £350,000 – the amount of LBTT payable will increase

Supporting business

In terms of investing in the Economy, the Finance Secretary announced a number of measures to support Scottish businesses, including:

The establishment of an Advanced Manufacturing Challenge Fund, where £18 million will be ringfenced to ensure Scotland benefits from advances in manufacturing.

Promotion of the export market by £5 million as a first phase of a £20 million plan to assist companies looking to sell their products abroad.

A cap on the increase in the rates poundage in Scotland, this will see over 90% of properties in Scotland and all small and medium sized businesses, paying a lower poundage than their UK counterparts.

The small business bonus scheme thresholds will continue seeing over 100,000 properties lifted out of the rates regime completely.

Climate change focus

In terms of tackling climate change the following measures were announced:

£80 million investment in Active Travel, to make towns and cities safer places for active travel.

£50 million investment in low carbon measures, to include expanding the electric charging infrastructure and ensuring Scotland is on target to phase out the need for new petrol and diesel cars and vans by 2032.

Funding almost £59 million of forestry, as part of the Scottish government’s climate change targets.

Making available £145m for energy efficiency, fuel poverty and heat decarbonisation.

Get in touch 

For more information on the draft Scottish Budget announcement and how it affects you, please don’t hesitate to get in touch with me, Susie Walker, or your usual Johnston Carmichael contact.