The Scottish Budget 2024/25: widening the divergence

The Scottish Budget 2024/25 introduced a new 45% Scottish advanced rate of income tax on income between £75,001 and £125,140, which had been widely trailed in advance. More unexpectedly, the Scottish top rate of income tax was increased from 47% to 48%, widening the divergence between the Scottish and UK rates.

No changes were made to the rates of land and buildings transaction tax or the 6% additional dwelling supplement, and although the poundage rate for non-domestic rates was frozen, the 75% relief for leisure and hospitality businesses was not extended.

As we noted in last year’s review of the Scottish Budget 2023/24 (Tax Journal, 13 January 2023), in its Programme for Government 2021/22, the Scottish government had promised stability in relation to rates of both income tax, and land and buildings transaction tax. The Scottish Budget for 2023/24 (December 2022) swept this away, with increases in the two (then) highest rates of Scottish income tax; and in the additional dwelling supplement (ADS), the extra 6% land and buildings transaction tax payable in relation to dwellings in Scotland other than main residences. This trend at least in relation to income tax continued in the Scottish Budget for 2024/25, which was delivered on 19 December 2023. Unsurprisingly, the most recent Programme for Government (for 2023/24, published in September 2023) had few details of potential changes in actual tax law, but indicated much that had been done and is still to come at tax policy level.

This included the publication of a Medium-Term Financial Strategy and the creation of an external Tax Advisory Group, to support the development and delivery of a longer-term tax strategy. This will apparently lead to the creation (and publication) of a tax strategy for the Scottish government. At an even more elevated level, agreement has also been reached between the Scottish and the UK governments on the Fiscal Framework Review; the first substantive amendment to the Fiscal Framework since it was originally agreed in February 2016.

The pattern of new deliverers (or at least deliverers with different hats) of Scottish Budgets also continued, with this latest one being the first delivered by Shona Robison as Cabinet Secretary for Finance, succeeding (in reverse order) John Swinney as maternity cover for Kate Forbes, Kate Forbes in her own right, Kate Forbes as a very late replacement for Derek Mackay and Derek Mackay himself.

The timing of the latest Scottish Budget reverted to what was intended to be the norm – a few weeks after the UK Autumn Statement, so that the Scottish government could, in its proposals, take account of any substantive changes announced at a UK level. But this year at least, the Scottish government will be aware that the next Spring Budget could bring further UK changes in advance of a UK election in 2024; and it will not be possible for the Scottish government to react directly to any changes in time for the start of tax year 2024/25. Such are the vagaries of a partially devolved tax system.

Income tax

Income tax is an example of a tax that is only partially devolved even within a single tax: the Scottish Parliament can set rates and thresholds as they affect only earned and property income; other rules, structures and reliefs (including the level of personal allowance), as well as the rates affecting dividend and other investment income, remain controlled by the UK government, as do NICs. Of course, changes in the latter announced in the UK Autumn Statement came into effect on 6 January 2024, with reductions affecting those liable at all levels of relevant income.

The Scottish government, extending this aspect of its policy over the last few years, chose in its income tax changes to extend further one of its oft-stated principles: progressivity. In practice, this means further divergence between income tax rates for Scottish taxpayers on earned and property income, compared to the rest of the UK. Higher earners, continuously characterised ‘as those with the broadest shoulders’, will pay proportionately more than those with narrower shoulders anywhere in the UK – and increasingly more than those with the same breadth of shoulder elsewhere in the UK.

Supposed confidentiality of Budget proposals is now even less of a shibboleth in Holyrood than at Westminster. Among the most well-trailed tax changes from Scottish Budgets in recent times, a new rate of Scottish income tax was announced, affecting relevant income of Scottish taxpayers in the band between £75,001 and £125,140. The rate will be 45%. The rate acquired a name – ‘advanced’ – increasing the number of Scottish tax rates to six and the menagerie of differentiated Scottish tax rate names by one.

In a much less expected change, the Scottish top rate of tax itself advanced, by one percentage point, to 48%. This increases the differential for Scottish taxpayers on the highest part of their earned (or property) income, compared with taxpayers across the rest of the UK, from 2% to 3%. The thresholds for the starter and (Scottish) basic rate bands will increase in line with inflation (6.7%), while the higher and top rate thresholds will remain the same. The announcements on rates and thresholds produce the following table of tax rates on earned and property income for Scottish taxpayers for 2024/25 (the figures assuming that UK-set personal allowance does not change for that year, as is the most recently stated UK policy):

The introduction of the advanced rate increases the effects of an anomaly which derives from the UK rule that the personal allowance is withdrawn gradually (at £1 for every £2 of income) for incomes above £100,000. For Scottish taxpayers with earned/property income above that level, the slice of income between £100,000 and £125,140 will now be subject to income tax at a marginal rate of 67.5%, with 2% NICs payable in addition. The attractiveness of increased income subject to that level of tax will be increasingly questionable; in contrast, using that income for pension contributions or charitable donations comes at a further reduced direct cost to affected taxpayers.

In contrast, one other anomaly continues with slightly reduced effects, although the reduction derives from the changes to national insurance. NIC thresholds and the reduction in the main rates of NICs, which takes place when income exceeds certain levels, are now tied to the rUK higher rate income tax threshold (now fixed at £50,271 unless altered in the UK Spring Budget). This means that an employee with earnings between the Scottish higher rate threshold of £43,663 and the rUK higher rate threshold of £50,271 will suffer a marginal income tax and NIC rate of 52% on that ‘slice’ of income. The fact that the Scottish higher rate threshold did not increase at all for 2024/25 (despite a high rate of inflation) will mean that fiscal drag does its stuff, bringing more people into this marginal anomaly. As this is actually caused by the NIC rates, only pension contributions (but not charitable donations) can provide a version of an escape route.

The increased income tax rates for Scottish taxpayers have inevitably caused comments on the possible effects of the Laffer Curve, beloved of some economists, on the successive income tax ranges. The basic notion is simple enough: increase tax rates by enough and taxpayers will decline to earn the income taxable at the higher rates, thus reducing the overall tax take at some point on the curve. It is equally simple when considered at the extremes: 0% tax rates would produce no tax, while 100% tax rates would also produce no tax, as no one would work to retain nothing. (The simplicity towards the 100% end of the curve is flawed, because taxpayers’ decisions will also be driven by what is provided in return for the tax – an attractive argument to the Scottish government.)

In the Scottish context, there is an extra factor that is particularly relevant. In addition to taxpayers who may decide to do less work because of higher marginal or absolute rates, there may be taxpayers who decide to do the same amount of work, but not as Scottish taxpayers, or not for receipts in the form of earned or property income. While that consideration also applies to fully independent tax systems from which taxpayers can choose to withdraw in favour of a new location, it is perhaps easier and less disruptive to become a taxpayer elsewhere in the UK than to lose UK residency entirely. Easier, but not easy, with the tests for intra-UK tax status more akin to those applying to domicile than the residence rules. But the pure financial incentive to consider the possibility of such a move has certainly grown with this Scottish Budget, and any who successfully make such a move will take all of their income tax with them, not just that at the increased Scottish rates.

Land and buildings transaction tax

No changes were made to the rates of land and buildings transaction tax (LBTT) or the 6% additional dwelling supplement (ADS). The Scottish government confirmed that it will publish legislation to amend the ADS rules following last year’s consultation, which will include extending the timelines for the ADS replacement of main residence rules, addressing concerns about certain scenarios involving joint buyers, and extending the scope of residential LBTT relief for local authorities. Interestingly, receipts from LBTT for 2024/25 are forecast to fall to £730m, from £813m, apparently based on an expected reduction in property transactions.

Scottish landfill tax (SLfT)

The standard rate of SLfT will be increased to £103.70 per tonne and the lower rate of SLfT to £3.30 per tonne, from 1 April 2024, in line with planned UK landfill tax increases.

Non-domestic rates

In response to widespread requests from business, the nondomestic rates basic property rate (poundage) for properties with a rateable value up to £51,000 was frozen for 2024/25 at 49.8p, but other changes to non-domestic rates are likely to be less popular. In contrast to the position in England, where the 75% business rates relief scheme for retail, hospitality and leisure properties was extended to April 2025 in the UK Autumn Statement, there was no extension to the current relief for the retail, hospitality and leisure industry in Scotland. Instead, a 100% relief for hospitality businesses located on the Scottish islands was announced. The relief is capped at £110,000 per business. The Scottish government has, however, committed to continue discussions with the hospitality sector, through the New Deal for Business Non-Domestic Rates sub-group, on long-term issues such as the way that rateable values for hospitality sector properties are calculated.

The Scottish government also confirmed that it is committed to exploring the reintroduction of a non-domestic rates Public Health Supplement for large retailers selling alcohol and tobacco in advance of the next Scottish Budget.

Council tax

The council tax freeze for 2024/25, which was unexpectedly announced at the SNP conference in October 2023, was confirmed, together with a commitment from the Scottish government for the effects of the freeze to be fully funded with additional funding equivalent to a 5% increase in council tax. It is clear that there was no discussion with the councils about the council tax freeze before it was announced, and there is concern that the Scottish Budget proposals will not actually result in the council freeze being fully funded by the Scottish government, and will lead to cuts in essential services.

Scottish aggregates tax

The third tax to be fully devolved to Scotland, the Scottish aggregates tax (SAT), is expected to replace the UK aggregates levy on the commercial exploitation of aggregates such as crushed rock, sand and gravel in Scotland with effect from 1 April 2026. The Aggregates Tax and Devolved Taxes Administration (Scotland) Bill, which includes the provisions for the SAT was introduced to Parliament in November 2023, and the Finance and Public Administration Committee of the Scottish Parliament, which will be considering the bill, has issued a call for evidence, responses to which are invited by 9 February 2024.

Other new taxes

The Scottish government wants to introduce a Building Safety Levy on developers of residential property, similar to the UK government’s Building Safety Levy for England. This would be a new national tax, and the Scottish government is seeking the additional transfer of powers from Westminster which are necessary to introduce it. Revenues from the levy would be used to fund the Scottish Government’s Cladding Remediation Programme.

The Scottish government is also working with COSLA and local authorities on their request for councils to be given a discretionary power to introduce a Cruise Ship Levy, although significant further engagement with businesses and other stakeholders is still required. The Visitor Levy (Scotland) Bill, which will give local authorities the discretion to charge a Visitor Levy (a ‘tourist tax’) on overnight stays, is currently before the Scottish Parliament. It is unlikely that the visitor levy will be introduced before 2026 given the need for councils to consult with stakeholders about it in their local areas.

The Scottish government also announced a commitment to work closely with COSLA and local government to examine how regulatory and fiscal policy measures could improve a wide range of land management outcomes, including the restoration of peatlands and the creation of more woodlands. This will also include consideration of a proposal for a Carbon Emissions Land Tax, as suggested by the John Muir Trust.