Scotland could see up to six levels of income tax band
07 November 2017
New approaches to taxation in Scotland have been published in a discussion document which includes proposals for new tax regimes with four, five and even six levels of income tax bands.
With the impact of austerity, Brexit and changing demographics, Scotland’s First Minister asks if the time has come for those who earn the most, to pay a modest amount more in income tax. Nicola Sturgeon has called on all political parties to engage in an open debate about tax in Scotland.
The comments coincide with the publication of a discussion paper ‘The Role of Income Tax in Scotland’s Budget’ budget which includes some very new approaches to taxation.
Derek Mackay, cabinet secretary for Finance and the Constitution, outlines in the introduction of the paper that Scotland faces a critical challenge:
“The UK government’s apparent determination to continue with austerity, coupled with the real risk of a hard Brexit, puts our economy and public finances in jeopardy. By 2020, the Scottish budget will have faced a decade of cuts – a £2.9 billion cut in real terms since 2010 – coupled with cuts in the capital budget, and with further cuts expected in the coming years. This means it is time for the government, Parliament and Scotland’s people to explore alternative approaches and, in particular, consider whether now is the time to use our limited tax powers differently.”
Included within the discussion paper are proposals for new tax regimes to be introduced:
A tax regime with three bands
Approach 1 would keep the three existing income tax bands but add one penny on both the higher and additional rates of income tax. The basic rate would be left unchanged at 20p. The higher rate of tax would increase in line with inflation.
A tax regime with four bands
Approach 2 would introduce a new income tax band for low earners based around the median income, resulting in four income tax bands as opposed to the current three. Earnings between £11,850 and £24,000 would continue to be taxed at 20p. Earnings between £24,001 and £44,290 would be taxed at 21p and earnings between £44,291 and £150,000 would be taxed at 41p. In taking this approach, the additional rate would be increased firstly by 3p to 48p (Approach 2A) and then by 5p to 50p (Approach 2B).
A tax regime with five bands
Approach 3 would split the current higher rate band at £75,000, further increasing the tax liability for the top 4% of Scottish income taxpayers. Earnings of between £44,291 and £75,000 would be taxed at an extra 1p compared to the current system. Earnings between £75,001 and £150,000 would be taxed at an extra 2p at a rate of 42p. The higher rate of tax would increase in line with inflation.
A tax regime with six bands
Approach 4 would increase the number of income tax bands from three to six. Earnings of between £11,850 and £15,000 would be taxed at 19p, as opposed to 20p at present. Earnings between £15,001 and £24,000 would be taxed at the 20p rate as they are now. The other rates and bands are essentially the same as under Approach 3 which would split the current higher rate band at £75,000, further increasing the tax liability for the top 4% of Scottish income taxpayers. Earnings of between £44,291 and £75,000 would be taxed at an extra 1p compared to the current system. Earnings between £75,001 and £150,000 would be taxed at an extra 2p at a rate of 42p. The higher rate of tax would increase in line with inflation.
Read the full discussion paper ‘The Role of Income Tax in Scotland’s Budget.
Nicola Sturgeon has stressed that these alternative approaches are not at this stage firm policy proposals - that will come in the budget (14 December 2017), nor do they form an exhaustive list - they simply illustrate some of the options that are open to us. Reportedly the Scottish Government will not propose alterations to income tax rates lightly, but after rigorous, careful and considered discussion, they will bring forward policy proposals that they consider to be in the interests of the country as a whole.
The CIPP Policy team will be actively involved in this discussion document and will report to members and the profession accordingly. In the meantime the tax and spending decisions for 2018/19 will be published in the Draft Budget on 14 December 2017. We will publish a concise summary of ‘need to know’ announcements on our website news page on the day, which will also be circulated through our News On Line email distribution.