Chapter 2 Tax Policy
Despite the success of the vaccine roll-out allowing the Scottish economy to reopen faster than forecast at the time of the last budget, the past year has been extremely challenging for both businesses and households, and the pandemic continues to impact our society. Although unemployment is now expected to remain relatively low, and household incomes have increased as people have returned to work with the end of the furlough scheme, significant risks remain. The disruption to global supply chains caused by the pandemic has contributed to an increase in inflation, which is forecast to rise to its highest rate in a decade. This risks eroding households’ living standards, particularly for low-income households, which are more exposed to rising energy prices.
In the Programme for Government 2021-22, we committed to providing certainty and stability for taxpayers, as a foundation for the ongoing recovery. That is what the tax package set out below delivers. We continue to offer the lowest Basic Property Rate for non-domestic properties in the UK and will provide ongoing relief for the retail, hospitality and leisure sectors, following two full years of 100% rates relief. Our tax policies protect essential public services and deliver the revenue we need to offer more support to those that need it the most – for example, doubling of the Scottish Child Payment for under 6s from April 2022 and for all under 16s at the end of next year.
We also continue to deliver a more progressive tax system, ensuring fairness is at the heart of our Scottish Approach to Taxation. In August we sought views on Scotland’s first Framework for Tax, which sets out our approach in more detail, underpinning the design and delivery of tax policy in Scotland. This exemplifies and reinforces our commitment to engagement, transparency and open government. The Framework will be finalised in the coming days, and we are grateful for the breadth and depth of engagement, resulting in genuine co-production.
As part of the same consultation exercise, we also sought views on how the Scottish Government should use its devolved and local tax powers in this budget. We met with, and listened carefully to, a wide range of stakeholders, including tax professionals, business representatives, civil society organisations and leading research institutes. Some important themes emerged, which have informed the development of the policy package set out below.
Key themes from Consultation Responses
Responses highlighted the ongoing need for stability in the tax system at this time. Stakeholders cautioned against tax policy changes that would add additional pressure to business or household finances. Related to this were some calls for no further divergence between Scottish and UK tax policy (e.g. income and property taxation). However, in contrast, there were also calls for the tax system to be more progressive and that stability should not necessarily mean a static approach to tax policy development. Some stakeholders also called for the Scottish Government to concentrate on improving the operation of existing national and local tax powers, and the delivery of assigned taxes, before focusing on further tax powers.
Recovery from the pandemic was highlighted as a top priority across numerous stakeholders’ responses, with calls for continued business support through the Non-Domestic Rates system. In this respect, as above, stakeholders called for a stable package of support to businesses, including the removal of conditions to access financial support and parity with the UK Business Rates system. Stakeholders cautioned against the introduction of any new business taxes or levies that may impact the recovery. Additionally, there were several calls for further financial support for high street and city centre businesses.
Among organisations’ and individuals’ responses there were widespread calls for tax policy reform over the course of the Parliamentary session. This was across several areas of taxation, but focused predominately on local tax powers (e.g. Non-Domestic Rates and Council Tax). Some stakeholders raised specific issues in relation to Non-Domestic Rates policy, such as revaluations policy, and some pressed the need for fundamental reform. Some stakeholders highlighted the need for more progress to be made on reforming Council Tax. Although responses welcomed a recent commitment to hold a citizens’ assembly on sources of local government funding, there was a recognition that a timetable for action was also important.
The Scottish Parliament has the power to set the Income Tax rates and bands for the non-savings, non-dividend income of Scottish taxpayers, with the revenue received coming to the Scottish Government through the operation of the Fiscal Framework. Responsibility for the other parts of the Income Tax system, which includes reliefs and exemptions, and setting the UK-wide Personal Allowance, remains reserved to the UK Parliament. Income Tax on savings and dividends income is also reserved and continues to be paid to the UK Government.
Significant changes to Scottish Income Tax were implemented in the Scottish Budget 2018-19, delivering a fairer and more progressive five-band structure. As set out in the Programme for Government 2021-22, our aim is to maintain current Income Tax rates and increase thresholds by no more than inflation over the duration of this parliament.
In line with this aim, Scottish Income Tax rates will remain unchanged in 2022-23. The Starter and Basic Rate bands will increase by CPI inflation (3.1%). The Higher and Top Rate thresholds will remain frozen in cash terms at £43,662 and £150,000, respectively.
In the UK Autumn Budget (October 2021), the UK Government confirmed that the UK-wide Personal Allowance would remain frozen at £12,570 in 2022-23 (and until 2025-26).
Rates and Bands
|Starter Rate||Over £12,570 - £14,732||19%|
|Basic Rate||Over £14,732 - £25,688||20%|
|Intermediate Rate||Over £25,688 - £43,662||21%|
|Higher Rate||Over £43,662 - £150,000*||41%|
|Top Rate||Over £150,000**||46%|
* Assumes individuals are in receipt of the Standard UK Personal Allowance
** The Top Rate remains at 2021-22 level. Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000
As first set out in our paper The role of Income Tax in Scotland’s Budget in November 2017, the Scottish Government’s priority on Income Tax is to make the tax system fairer and more progressive, and to protect low- and middle-income taxpayers. At the time, we were clear that when living costs are rising, taxpayers in lower income brackets should not pay more tax, and this remains our priority. As we look ahead to 2022-23, inflation will continue to put pressure on living standards, with the impacts of rising energy prices likely to be felt by lower income families more than any other household.
Our Income Tax policy for 2022-23 therefore focuses on supporting those who are currently facing the most significant financial pressures, at the lower end of the income distribution. Our decision to increase the Starter and Basic Rate bands by inflation will maintain spending power across low- and middle-income households. Furthermore, the majority [54%] of taxpayers will continue to pay less Income Tax in 2022-23 than they would if they lived elsewhere in the UK.
According to SFC forecasts, freezing the Higher Rate Threshold will raise an additional £106 million in 2022-23. This policy only affects 17% of Scottish taxpayers, or 10% of all adults, and ensures we can continue to raise revenues to fund public services for all. Had we increased the Higher Rate Threshold by inflation, that would mean £106 million less to spend on priorities like our NHS and education system. Instead, those living in Scotland continue to have access to a wider and better funded range of free-to-access public services than elsewhere in the UK – including universal free prescriptions and tuition fees.
More information on the 2022-23 policy proposals, including a factsheet and analytical note, is available on the Scottish Government’s website.
Scottish Rate Resolution
The Scottish Parliament must pass a Scottish Rate Resolution each year to set the rates and bands for Scottish Income Tax. A draft of the motion setting out the proposed Scottish Income Tax rates and bands for 2022-23, and an accompanying explanatory note, is available on the Scottish Government’s website.
The SFC’s forecasts for Scottish Income Tax receipts in 2022-23 determine the revenue that the Scottish Government will be able to draw down from HM Treasury during the year ahead. Forecasts for Income Tax receipts are set out in Table 2.02.
Land and Buildings Transaction Tax
Land and Buildings Transaction Tax (LBTT) is a tax applied to residential and non-residential land and buildings transactions (including commercial leases) where a chargeable interest is acquired. The Additional Dwelling Supplement (ADS) is payable, as part of LBTT, on purchases of all relevant residential properties for £40,000 and above.
We will maintain residential rates and bands at their current level. This preserves our progressive system, delivers certainty and stability for taxpayers and is consistent with the commitment we made in the Programme for Government 2021-22.
The First-Time Buyer Relief will also continue to be available. This has the effect of increasing the nil rate band from £145,000 to £175,000 for first-time buyers.
We will maintain current non-residential LBTT rates and bands, which remain broadly competitive in a UK context, and again offers certainty and stability for taxpayers.
Additional Dwelling Supplement (ADS)
The ADS will continue to be charged at 4% in 2022-23.
Following the commitment in the Programme for Government 2021-22 to undertake a review, the Scottish Government will shortly launch a call for evidence and views on the ADS.
The review will not consider whether the ADS should continue, its overall impact or the specific rate at which it should be charged. Rather, our focus will be on the operation of the ADS. As a first step, we will seek views in order to build a clear and shared understanding of stakeholder and taxpayer concerns, develop a stronger evidence base on the need for change and identify any propositions for legislative change.
Rates and Bands
Rates and bands in 2022-23 will remain as follows:
|Nil rate band||Not more than £145,000||0%|
|First tax band||More than £145,000 but not more than £250,000||2%|
|Second tax band||More than £250,000 but not more than £325,000||5%|
|Third tax band||More than £325,000 but not more than £750,000||10%|
|Fourth tax band||More than £750,000||12%|
The ADS rate of 4% applies to the total price of the property for all relevant transactions of £40,000 or more, and will be charged in addition to the rates set out in Table 2.03.
|Nil rate band||Up to £150,000||0%|
|First tax band||Above £150,000 to £250,000||1%|
|Second tax band||Above £250,000||5%|
|Band||Net present value of rent payable||Rate|
|Nil rate band||Up to £150,000||0%|
|First tax band||Above £150,000 to £2m||1%|
|Second tax band||Above £2m||2%|
The forecasts for Land and Buildings Transaction Tax revenues are set out in Table 2.06.
|Land and Buildings Transaction Tax||720||749||796||839||881||924|
|Residential transactions (excl. ADS)||380||390||420||451||480||510|
|Additional Dwelling Supplement (ADS)||125||133||141||145||148||152|
Scottish Landfill Tax
Scottish Landfill Tax (SLfT) is a tax on the disposal of waste to landfill, charged by weight on the basis of two rates: a standard rate; and a lower rate for less-polluting materials.
The rates set for SLfT are intended to serve as a financial incentive to support a more circular economy, and the delivery of our ambitious targets to reduce waste, increase recycling and cut waste going to landfill.
Landfill operators can voluntarily contribute a capped proportion of their landfill tax liability to the Scottish Landfill Communities Fund (SLCF) and claim 90% of the contribution as a tax credit. In order to claim a credit, the funds must be used for one or more of the objectives set out for the SLCF.
We will increase the standard rate of SLfT to £98.60 per tonne and the lower rate of SLfT to £3.15 per tonne in 2022-23, maintaining consistency with Landfill Tax charges in the rest of the UK.
This will provide a stable tax environment, whilst addressing concerns over the potential moving of waste around the UK should one part of the UK have a lower tax charge than another, often referred to as ‘waste tourism’.
The credit rate for the Scottish Landfill Communities Fund for 2022-23 will remain at a maximum of 5.6% of an operator’s tax liability. This will ensure that landfill site operators can continue to contribute to community and environmental projects near landfill sites to a greater degree than their UK counterparts, without any increase in the overall tax burden.
The forecasts for Scottish Landfill Tax revenues are set out in Table 2.07.
|Scottish Landfill Tax||123||101||83||85||70||18|
1. Adjusted downwards for payments to the Scottish Landfill Communities Fund (SLCF)
Non-domestic rates (NDR), often described as business rates, are a local tax levied on lands and heritages used for non-domestic purposes in the public, private and third sectors. NDR are administered and collected by local authorities, who retain all the NDR revenue they raise to help fund the local services they provide. National NDR tax rates and reliefs are confirmed annually by the Scottish Government.
The Scottish Government acted swiftly to support businesses at the start of the pandemic and over the past 20 months, with a COVID-19 relief package totalling around £1.6 billion in 2020-21 and 2021-22. In 2021-22 we also took the unprecedented step of reducing the poundage mid-revaluation, saving ratepayers £127 million compared to an inflationary increase, effectively maintaining rates at the same level for three years in a row in Scotland. The Scottish Budget will deliver a below inflation uplift in the Basic Property Rate (‘poundage’) for the fourth year in a row, to just 49.8 pence. This continues to be the lowest poundage in the UK and will save ratepayers £40 million compared to an inflationary increase.
The amount of tax due is based on the rateable value of the property multiplied by the Basic Property Rate (‘poundage’), or the Intermediate, or Higher Property Rate, where relevant, minus any reliefs to which the property is entitled.
Independent Assessors set the rateable value of a non-domestic property, which is based on the notional annual rent the property would attract on the open market if vacant and to let. Non-domestic properties are periodically revalued to reflect prevailing economic circumstances. The most recent revaluation took place in 2017, with the next scheduled for 2023 having been delayed by one year due to COVID-19. This decision, alongside the introduction of a one-year tone date, will offer certainty to businesses in the recovery period and ensure that values at the next revaluation accurately reflect the property market prevailing at the time.
The main tax rate is the poundage, which is a pence in the pound tax rate set by Scottish Ministers. Two additional rates are levied on properties with rateable value over £51,000 and over £95,000, respectively.
In addition to increasing the poundage by just 0.8p, the Scottish Budget 2022-23 confirms:
- the Intermediate Property Rate at 51.1p (the poundage plus 1.3p), which will be charged on properties with a rateable value (RV) of between £51,001 and £95,000; and
- the Higher Property Rate at 52.4p (the poundage plus 2.6p), which is charged on properties with a RV above £95,000.
Taken together, these policies will ensure that at least 95% of properties are liable for a lower non-domestic tax rate than anywhere in the UK.
|Basic Property Rate ('Poundage')||49.8p|
|Intermediate Property Rate (rateable values between £51,001 and £95,000)||51.1p (Poundage +1.3p)|
|Higher Property Rate (rateable value above £95,000)||52.4p (Poundage +2.6p)|
In 2021-22 the Scottish Government maintained 100% Retail, Hospitality, Leisure and Aviation relief for the entire year. This is forecast to save businesses in these sectors £712 million in 2021-22. Recognising the calls from the business community for further support, the Scottish Budget will continue this relief for properties in the retail, hospitality and leisure sectors, at 50% relief for the first three months of 2022-23, capped at £27,500 per ratepayer. This will save ratepayers in these sectors an estimated £56 million in 2022-23.
The Scottish Budget 2022-23 will also expand the Business Growth Accelerator relief for property improvements to include the installation of solar panels as a qualifying improvement. The Business Growth Accelerator provides 100% relief on new builds for up to 12 months after first occupation and no rates increases for 12 months after a qualifying property improvement. The expansion will help to promote a green recovery as we strive to meet our Net Zero emissions target.
We will also extend Enterprise Areas Relief by one year until 31 March 2023 before it is reviewed. This relief provides support to some of our most dynamic industries with the greatest potential to create new employment opportunities, stimulate private investment and boost economic growth.
The budget will also maintain the following reliefs which are set annually.
- Small Business Bonus Scheme relief, which has lifted over 111,000 properties out of rates altogether as at 1 June 2021.
- Transitional Relief, which caps annual rates bill increases at 12.5% for Aberdeen City and Aberdeenshire offices and for all but the very largest hospitality properties across Scotland.
All the other existing non-COVID-19 NDR reliefs will be maintained in 2022-23, which is forecast to save ratepayers £745 million. To level the playing field for all non-domestic properties, we will lay legislation to help local authorities tackle a known avoidance tactic on empty non-domestic properties. This policy will provide local authorities with the discretion, in prescribed circumstances, to restrict the awarding of 100% empty property rates relief where the occupier has entered insolvency, compulsorily (by the court) or voluntarily. This will deliver greater fiscal empowerment for councils in advance of the devolution of empty property relief in April 2023.
Our NDR package for 2022-23 therefore ensures that we continue to support our business community as we emerge from the pandemic.
NDR reliefs are subject to the domestic subsidy control regime, which is governed by the UK’s international commitments on subsidy control arising from, amongst others, the EU-UK Trade and Cooperation Agreement, World Trade Organisation Membership and commitments arising from international treaties and agreements to which the UK is a party.
Recognising the impact of COVID-19, the Scottish Government chose last year to delay the implementation of the requirement that self-catering properties be let for 70 days in order to be classed as non-domestic. We will lay legislation for 2022-23 to deliver this anti-avoidance measure, which has been recommended by the independent Barclay Review of Non-Domestic Rates in order to tackle a known potential loophole for second homes.
Forecast tax revenues for NDR from 2021-22 are set out in Table 2.09 below.
Council Tax is a local tax, with receipts retained by local government and separate from the Scottish Budget. It makes a significant contribution to the funding of public services. Every household in Scotland potentially has a council tax liability, although the council tax reduction scheme reduces this for around 500,000 households according to need and ability to pay.
In 2021-22, acknowledging the impact of the pandemic on households, the Scottish Government secured local government’s agreement to freeze Council Tax at 2020-21 rates. For 2022-23, councils will have complete flexibility to set the Council Tax rate that is appropriate for their local authority area.
In setting Council Tax rates, we expect councils to take full account of local needs and of the impacts on household budgets of the decisions they make.
Air Departure Tax
We remain committed to introducing Air Departure Tax (ADT) when a solution to the Highlands and Islands exemption issue has been found. As stated in the Programme for Government 2021-22, the Scottish Government intends to protect the Highlands and Islands exemption and to review the Air Passenger Duty (APD) rates and bands ahead of the introduction of ADT to ensure that policy aligns with Scotland’s climate change goals.
Until ADT is introduced, the UK Government will maintain the application of Air Passenger Duty in Scotland.
The Scotland Act 2016 gave the Scottish Parliament the power to introduce a devolved Aggregates Levy in Scotland. The UK levy is paid on the commercial exploitation of aggregates, i.e. sand, gravel and rock.
We will continue to progress work on a devolved levy, including through the introduction of the necessary primary legislation in this session of the Scottish Parliament.
The Scotland Act 2016 allows for the first ten pence of standard rate VAT receipts and the first 2.5 pence of reduced rate VAT receipts raised in Scotland to be assigned to the Scottish Government (known as VAT assignment). As VAT receipts for Scotland are not identifiable from tax returns, assigned VAT will be based on a model of expenditure in Scotland.
VAT assignment had been expected to be fully implemented in April 2021, but a postponement was agreed due to the exceptional levels of economic uncertainty generated by COVID-19 and EU exit, with a commitment to review implementation as part of the wider Fiscal Framework Review.