Tax - Fraser of Allander Institute Blog

Scottish income tax policy 2019/20

This afternoon, Mr Mackay set out the proposed income tax parameters for 2019/20 in the draft Budget.

These are shown in the table at the bottom of this blog, together with last year’s policy and the 2019/20 UK policy.

Mr MacKay said that 99% of Scottish income taxpayers will pay less tax in 2019/20 than they did in 2018/19.

This statement is correct in the sense that, in 2019/20, 99% of taxpayers will benefit from a higher tax-free personal allowance**, (and to a lesser extent the Scottish Government’s increase in the thresholds for the basic and intermediate rates).

What about comparisons with the rest of the UK? Mr Mackay pointed out that 55% of Scottish taxpayers will pay less income tax than rUK taxpayers with equivalent income.

This is true in that the 19% Starter Rate in Scotland means that those with income less than £27,000 (slightly above the Scottish median income) will pay less tax than rUK counterparts.

It is worth bearing in mind however that the difference between Scottish and rUK tax liabilities at this end of the income distribution is small – the maximum benefit to Scottish income taxpayers is just over £20 per year.

Some examples of the difference in liabilities for different salaries are given in the diagram below.

VAT Assignment – A bridge too far for fiscal devolution?

Alongside this month’s Budget, the Scottish Fiscal Commission will set out forecasts for VAT revenues in Scotland.

2019-20 will mark the first year in which VAT assignment will be explicitly incorporated into the Budget (although, as with all the phased implementations of Scotland’s new tax powers it will be 2020-21 before it has a meaningful implication for spending).

In this blog we remind readers of the background to VAT assignment, discuss the approach that has been put forward for implementation and outline some implications for the Scottish Budget.

Working out how much VAT is raised in Scotland is exceptionally difficult. Unfortunately, a paper published recently by the UK Government on how it plans to do this suggests that little progress has been made in finding a robust way forward after over 3 years of trying.

Given the sums involved, the Scottish Parliament would be taking on a significant – and unreasonable – risk based upon current plans. It should, at the very least, press for a delay in the assignation of VAT to the Scottish Budget.Continue reading

Comparing Scottish and rUK income tax liabilities – scenarios for 2019-20

Yesterday, the Chancellor of the Exchequer announced changes to income tax in the UK Budget, setting a new higher rate threshold (HRT) of £50,000 for taxpayers in the rest of the UK and a personal allowance of £12,500 for all taxpayers.

What does this mean for taxpayers in Scotland?

The real terms increase to the personal allowance will apply in Scotland. Compared to a scenario where the personal allowance had increased in line with inflation, the policy provides a tax cut of around £70 per year for most of Scotland’s 2.5 million income taxpayers in 2019/20.

The increase in the higher rate threshold – the threshold above which the higher 40% tax rate is charged – represents a tax cut to higher rate taxpayers in rUK*.

But the increase in the HRT will not apply in Scotland. Instead, it will be up to the Scottish Government to decide how to respond in its December budget.

Examining the economic case for a reduction in Air Departure Tax

Daniel Borbely is a PhD student in the Department of Economics. In this post he examines the potential economic impacts of a reduction in the rate of Air Departure Tax in Scotland.

Following devolution of Air Passenger Duty (APD), the Scottish Government has set out its plan to introduce a new Scottish version of the tax, the Air Departure Tax (ADT).[1] The ADT would be levied on passengers departing from Scottish airports.

As part of this, the Government has committed to reduce ADT by 50% by the end of this parliament, and abolish it, in the long-run, “when finances allow”. The aim is to increase the connectivity of Scottish airports and to make them more competitive.

But there remains debate over the evidence base to support (or argue against) the notion that cutting ADT will deliver the expected economic, budgetary and environmental benefits hoped for.Continue reading

Outturn Scottish income tax revenues 2016/17

Buried away in a technical annex to its 2017/18 Annual Accounts, HMRC last week published Non-Savings, Non-Dividend (NSND) income tax outturn data for Scotland in 2016/17.

This is the first published outturn data for Scottish NSND income tax since the Scotland Act 2016 transferred responsibility for setting the rates and bands of NSND income tax to the Scottish Parliament. It is also the first outturn data published on the basis of HMRC’s Scottish taxpayer codes.

So what does the data say?

HMRC estimates Scottish NSND outturn revenues at £10.7bn in 2016/17.

How does this compare to the latest forecasts? Continue reading