One thing a tax budget always sparks is a flurry of puns. Well, I woke this morning to a flurry of snow and ok, a few good puns.  The most notable for me is: ‘Winter is coming’, well if you are a Scottish Resident Taxpayer, then ‘Winter is here’.

So having perused the announcements of John Swinney’s draft 2023/24 budget, who are the Winners and Losers in the detail and what does it mean for Scotland which is already in the ‘Winter of Discontent’?

Scottish Fiscal Commission

Alongside yesterday’s Scottish budget, the Scottish Fiscal Commission released its latest set of forecasts for the Scottish economy.

• Scottish GDP is expected to not come back to pre-pandemic levels until we hit 2025.

• Growth is expected to be slower in Scotland than the UK average.  With inward investment a key component driving growth and given ‘local’ headwinds of higher costs of living, higher interest rates and ongoing headaches for trade following Brexit, the budget must manage the external market message, as well as the internal messaging.

• If Scotland becomes less attractive to the top talent and/or costs of operating become more prohibitive, then the work for Scotland Plc to bounce back to pre-pandemic levels becomes harder and this has a knock-on impact to the income tax base, which in turn would undermine budget projections.

Key draft Scottish budget takeaways

Scotland’s funding position is complicated by the workings of the block grant from Westminster, the wider UK trends in growth and the UK Government Budget (set out in November).

With various devolved levers at the ready, Scotland as part of plugging its funding gap started to pull those levers in the budget:

Scottish Rate of Income Tax changes

• A reduction was made in the additional rate threshold at which you pay the top rate of tax from £150,000 to £125,140 and that top rate of tax increased from 46% to 47%.  So, for top rate Scottish taxpayers with earned income and non-savings income there will be a 47% tax rate come 6 April 2023 versus 45% in rest of the UK. However, given Scotland’s high dependence on a small number of high earners this threshold reduction is expected to bring only circa 12,000 more taxpayers into the frame.

• In Scotland, the higher rate threshold captures those earning more than £43,663, the tax rate in this bracket went up by a further 1% yesterday to a 42% rate.  Whereas in the rest of the UK the higher rate threshold starts much higher at £50,270. For those earning between £43,662 and £50,270, yesterday’s announcement of an additional 1% will be particularly hard felt.  The overall tax rate (Income Tax and National Insurance combined) is 54% on such earnings from 6 April 2023, versus 32% in the rest of the UK.  In pounds and pence, earning £50,270 in Scotland sees you pay £1,611 more in income tax than in the rest of the UK. 

• With the average taxpayer in Scotland having before tax earnings of circa £25,000, the Fraser of Allander Institute estimated that 10% of Scottish taxpayers earn over £43,663 and so a small percentage of the Scottish population shoulder yesterday’s tax increases introduced for higher rate and additional rate taxpayers.  Given greater working from home flexibility post the pandemic it will be interesting to see if Scotland’s greater divergence away from rest of UK income tax rates will see movements in where talent wants to be based and so a ‘brain drain’ from Scotland which in turn would undermine budgetary projections. 

• ‘Local’ tax rates will undoubtedly influence big business when it comes to location within the UK for inward investment.  Scotland has much going for it in attracting big business but tax policy does shape decision making. 

The “Edinburgh Reforms”

The Scottish budget tax rises for higher rate and additional rate taxpayers came hot on the heels of the UK Chancellor’s regulatory reforms to the UK financial services sector, termed the ‘Edinburgh reforms’.  These reforms to the financial services sector are to help deliver much needed economic growth into the UK following on from Brexit by tailoring regulation to meet the specific UK financial services sector requirements.  With Edinburgh, being the largest UK financial sector outside of London, with some 30,000 Scottish employees making up this pool of talent, the Scottish economy has much to be gained from setting a tax policy that attracts UK and worldwide talent.  In the long run that will generate greater growth and tax revenues for the Scottish economy.

Land and Buildings Transaction Tax changes

The Additional Dwelling Supplement (ADS) rate was raised by 50% from 4% to 6% effective from 16 December 2022. The ADS is an additional tax charge generally suffered when individuals acquire a second residential property, unless certain conditions are met (for example a second property was acquired to replace an existing home).

This move is likely to further weaken demand from property investors, both internal and external in a residential property market already feeling the impact of higher interest rate rises.  The hope of the Scottish Government, one assumes is to create more of a bank of homes to be available for first time buyers but given prohibitive interest rates and stricter lending criteria as a result, this is likely to take some time to filter through.

Meanwhile this additional tax charge is likely to have an immediate impact to those looking to restructure existing property portfolios by incorporating to manage tax bills or growing those property portfolios, potentially creating surplus supply in the residential property market given current financial headwinds.

An average property of £200,000 will cost £4,000 more to acquire on 16 December, versus 15 December, a not insignificant additional cost to be added to other additional financing costs due to current rates of inflation.

Onwards we go

Whilst much commentary exists out there on how the majority of taxpayers in Scotland pay less tax than wider UK , the differential is only circa £21 of less tax for those earning less than £25,688.  Yesterday’s announcements made no further increase to this differential and in the current climate this sum will not be noticed given the ongoing cost of living crisis. 

So here’s to better days ahead, ‘Goodbye Winter…Spring has Sprung’.

Further Details

Further analysis from myself and other specialists can be found on our Budget Hub.

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