Scottish Budget 2019: Spending Measures & Income Tax Freeze

Scotland’s 2019 Budget has been announced: what should taxpayers know about its key tax and spending measures?

Scotland’s Draft Budget was published on 12 December 2018 with Finance Minister Derek Mackay setting out his plans for taxation and spending in 2019. The budget follows a positive forecast from the Scottish Fiscal Commision which predicts economic growth in Scotland of 1.4% in 2018, and 1.2% in 2019.

Notable features of the 2019 Budget are funding for the health service, schools, childcare, and local government - along with decisions on the Scottish income tax system, which went through a restructuring earlier in 2018. Looking at the 2019 Budget in greater detail, its key features are as follows:

Spending & Funding

  • Healthcare: After commitments from the UK government, NHS Scotland is set to benefit from a funding allocation of almost £730m for health and care services.
  • Schools: £180m will be invested in schools, with the aim of increasing student attainment levels.
  • Childcare: £500m will be committed to childcare in Scotland - in particular to boost the expansion of early learning services.
  • Local government: Scotland’s local councils will receive increases in capital funding, amounting to a local government budget of £11.1bn.
  • Business: £5bn in capital investment will be directed towards Scottish infrastructure - this amount will include £50m for improving and regenerating high streets. £130m will be put towards the creation of a new Scottish National Investment Bank.

Public Sector: The Budget includes a proposal to increase the pay of public sector workers. Specifically, those employees earning up to £36,500 will receive a 3% pay increase, while those earning up to £80,000 will receive a 2% increase. MSPs will receive a 2.3% increase.

Income Tax Rates

In 2018, the Scottish income tax system was restructured into 5 taxation bands. The Finance Minister has opted to maintain the current income tax rates of the new 5-band system in the 2019 Budget. Those rates break down as follows:

Tax Band

Taxable Income

Tax Rate

Starter Rate

£12,500-£14,549

19%

Scottish Basic Rate

£14,549-£24,944

20%

Intermediate Rate

£24,944-£43,430

21%

Higher Rate

£43,430-£150,000

41%

Top Rate

Over £150,000

46%

Like the wider UK regime, taxpayers receive a Personal Allowance of up to £12,500 which is not subject to tax. Since these tax bands only apply to Scotland, HMRC distinguishes ‘Scottish taxpayers’ based on their main place of residence.

Tax Divergence with the UK

The Finance Minister has also frozen the Scottish Higher Rate tax threshold at £43,430 in the 2019 Budget. This is in contrast to the rest of the UK, which will see the Higher Rate threshold rise to £50,000 from April 2019. The rate freeze will generate an estimated £68m for the Scottish Treasury - but adds to the divergence between the UK and Scotland tax regimes.

The tax rates in place across the rest of the UK are as follows:

Tax Band

Taxable Income

Tax Rate

Basic Rate

£12,500-£50,000

20%

Higher Rate

£50,000-£150,000

40%

Additional Rate

Over £150,000

45%

Under the Scottish system, from the 2019/2020 tax year, taxpayers can expect to pay different amounts of tax to other taxpayers in the UK. Broadly, employees in Scotland on lower wages will pay less tax than their UK counterparts - whereas higher earners will pay more. For example:

Annual Salary

Scottish Taxpayer

UK Taxpayer

£15,000

£479.5

£500

£33,000

£4,160.07

£4,100

£50,000

£9,044.07

£7,500

£200,000

£78,169.07

£75,000

Passing the Budget

The Draft Budget will now be subject to a vote in the Scottish Parliament where, as a minority government, the SNP will be seeking help from other parties to ensure its passage. Given current political divisions, the Finance Minister may well offer concessions to win support for the budget.

Despite criticism of the rate freeze, Mackay has defended his tax decisions, commenting that the regime is “fairer and more progressive” and protects “lower and middle income taxpayers, while raising additional revenue to invest in public services and the economy.”

For more information on Scotland and the United Kingdom’s tax landscape, browse activpayroll’s UK Global Insight Guide...