The Scottish Budget 2020 – Tax implications
The new Scottish Income Tax rates
Public Finance minister Kate Forbes stepped up to deliver the Scottish budget following Derek Mackay’s sudden resignation earlier in the day.
The Scottish Budget had been due to be delivered in December however the UK general election meant that both the UK budget and the Scottish budget had to be postponed. Given that the UK budget will not be delivered until 11 March the Scottish budget has had to be delivered before the UK budget which is less than ideal and has meant the Scottish budget has had to rely on several assumptions and estimates.
The Income Tax rates in Scotland have differed from those in the rest of the UK since the radical reform in April 2018. The Scottish budget has set the rates and thresholds for 2020/21 and much emphasis was placed on the fact that rates have not increased. The higher and top rate tax thresholds have however frozen, resulting in those in the higher rate tax bands effectively paying more tax after you take account of inflation.
The new rates, assuming you are entitled to the personal allowance, are detailed below:
|Scottish Tax Bands 2020/21
||£12,501 to £14,585
|Basic rate band
||£14,586 to £25,158
|Intermediate rate band
||£25,159 to £43,430
|Higher rate band
||£43,431 to £150,000
We await to see what rates are announced for the rest of the UK when the UK budget is delivered on 11 March.
Who pays Scottish income Tax?
Given that many people live and work on different sides of the Scottish border or have homes throughout the UK there are a number of considerations to determine whether you are a Scottish taxpayer:
- You will be a Scottish Taxpayer if you live in Scotland, even if you work outside of Scotland. For most people this test will be straight forward however if you have more than one home in the UK, one may be in Scotland and one may not so you will need to determine which is your main home.
- If you have two or more homes, your main home will usually be where you spend most of your time. This may be somewhere that you rent or live in for free.
- If you work away, the place where you spend most of your time may not be your main home. In these circumstances your main home will be determined by the place where you have the most connections. For example:
- Where your family is located, if you are married.
- Where all your possessions are located.
- Where you have your banking facilities.
- Where you are a member of clubs or societies.
- If you cannot determine where your main home is, whether you are a Scottish taxpayer will be determined by counting the number of days you spend in Scotland. If the number of days in Scotland is more than the number of days you spend elsewhere then you will pay Scottish tax.
- If you move to or from Scotland in the tax year you must notify HM Revenue and Customs straight away. If you move to Scotland and you will be there for more than half the tax year, you will be a Scottish Taxpayer and this will be backdated to the start of the tax year that you moved. If you are an employee your tax code will be amended to start with an S and the Scottish tax rates will apply automatically through the PAYE system.
Despite these changes Kate Forbes has reinforced in her budget speech that 56% of Scottish taxpayers will pay less Income Tax than if they lived elsewhere in the UK, adding that the tax rates continue to make ‘Scotland’s Income Tax system the most fair and progressive’. However, if we compare the new Scottish rates with the existing rates in the rest of the UK you can see from the table below that higher earning taxpayers are considerably worse off.
||2020/21 position relative to the rest of the UK
||£20.85 better off
||£20.85 better off
||£20.85 better off
||£27.57 worse off
||£127.57 worse off
||£1,541.57 worse off
||£1,641.57 worse off
||£2,041.57 worse off
||£2,341.57 worse off
||£2,666.57 worse off
The Scottish Income Tax rates only apply to earned income such as wages, profits from self employment and pension income. As a result if you live in Scotland you will continue to be subject to the same rates as the rest of the UK with regards to dividend income and savings income but using the above revised thresholds.
Land and Buildings Transaction Tax
Kate Forbes also announced a new 2% band of Land and Buildings Transaction Tax (LBTT) for non-residential leases. The new rate will apply to lease contracts with effect from 7 February 2020 and applies where the Net Present Value (NPV) of the rental payments exceeds £2m. This proposal changes the existing structure to a three-tier system and is also stated to be ‘progressive and fair’.
|NPV of rent
||LBTT rate prior to 7 Feb 2020
||LBTT rate from 7 Feb 2020
|0 to £150,000
|£150,000 to £2,000,000
As with all tax changes there will be winners and losers for those close to the thresholds, if you are concerned about the impact on your household income or if you are unsure if the new Scottish Income Tax rates will apply to you, our tax experts are on hand to provide you with advice on your personal position.