Scottish Budget: 2023 to 2024

Chapter 2 Tax Policy

Context

The 2023‑24 Scottish Budget will prioritise investment in the Scottish Government's strategic objectives of: eradicating child poverty; transforming the economy to deliver a just transition to Net Zero; and providing sustainable public services. We are also going further in the level of investment for public services than set out in the Resource Spending Review in May.

We are making these decisions at a time when the Scottish economy is forecast to be in recession during 2023‑24 and when public finances are under significant pressure from record levels of inflation. The current fiscal devolution settlement places stringent limitations on the Scottish Government's ability to respond to these, and other economic circumstances, particularly as we do not have access to the same fiscal flexibilities and borrowing powers that other governments across the world do.

The majority of tax powers remain reserved to the UK Government and Scotland has only limited powers over taxation. However, these powers are the primary means of raising additional revenue for the Scottish Budget. The challenges facing our public finances in 2023‑24 have required us to examine and use all levers at our disposal in order to maximise the funding available to invest in and maintain our public services.

Our approach

The Scottish Government has taken significant steps to improve the taxes devolved to the Scottish Parliament, in line with our fair and progressive Scottish Approach to Taxation, as set out in our Framework for Tax. However, the circumstances before us mean that we now need to take further action.

The SFC forecasts that our income tax policy changes will raise £129 million in 2023-24. We estimate that freezing the Higher Rate Threshold has added an additional £390 million to the Income Tax forecasts compared to inflation.^[3] We have also made policy decisions in relation to Land and Buildings Transaction Tax (LBTT), which the SFC forecast will raise £34 million in additional revenue in 2023-24. The Scottish Government estimates that collectively these changes to Income Tax and LBTT will provide £553 million in 2023-24 when compared against uprating the Higher Rate Threshold in line with inflation.

The decisions we have made on tax, since the devolution of powers, continue to raise significant additional revenue for the Scottish Budget. On Income Tax specifically, the SFC estimate that the decisions we have made since 2017‑18, including decisions made this year, will add around £1 billion^[4] of revenue in 2023‑24, compared to implementing the rates and bands applicable elsewhere in the UK.

We have not taken our decisions on tax lightly and we recognise the challenging economic conditions that many people and businesses are facing. That is why we are asking those who are best able to contribute more to pay more.

In return, people living in Scotland have access to a range of social security benefits and public services that goes significantly beyond what is provided in other parts of the UK, including:

• the Scottish Child Payment, which we have recently increased to £25 per eligible child per week, opening the benefit to around 387,000 children;
• the abolition of tuition fees which means that undergraduate students living in Scotland graduate with less debt compared to those in England; and
• free prescriptions, which save Scottish patients £9.35 per item as compared to England.

The 2023‑24 Scottish Budget combines support for the most vulnerable in society with our investment in Scotland's economy and public services, delivering a package of benefits for people living in Scotland, making Scotland an attractive place to live, work, study and do business in.

Income Tax

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 Parliament through the operation of the Fiscal Framework. Responsibility for the remainder of the Income Tax system, which includes all reliefs and exemptions, and setting the UK‑wide Personal Allowance and associated taper rate, are reserved to the UK Parliament. Income Tax on savings and dividends income is also reserved.

Policy

Significant changes to Scottish Income Tax were implemented in the Scottish Budget 2018‑19, delivering a fairer and more progressive five‑band structure compared to the UK's three-band system.

For 2023‑24, we have chosen to further deepen this progressive approach, while seeking to raise additional revenue to support our vital public services during this challenging economic period. Our decisions for 2023‑24 have been taken against a backdrop of record‑high inflation, which is having a corrosive effect on the Scottish Government's spending power and the delivery of public services.

In the UK Autumn Statement, the UK Government confirmed that the UK‑wide Personal Allowance will remain frozen at £12,570 until 2027‑28, which will also apply in Scotland.

For 2023‑24, the Starter and Basic rate bands will be maintained from the previous year at £14,732 and £25,688 respectively. The Starter, Basic and Intermediate rates will remain unchanged from their 2022‑23 level. The Higher Rate Threshold will also be maintained at its current level of £43,662, and the Top Rate Threshold will be reduced to £125,140. An additional 1p will be added to both the Higher and Top Rates, bringing them to 42p and 47p respectively. These changes to the Scottish Government's tax policy are proposed to take effect from 6th April 2023.

Policy on rates and thresholds will continue to be set annually and we will consider the Income Tax position alongside the wider funding and economic landscape at the 2024‑25 Scottish Budget.

Table 2.01: Scottish Income Tax Policy Proposals 2023‑24

Band	Income Range	Rate
Starter Rate	£12,571 - £14,732*	19%
Basic Rate	£14,733 - £25,688	20%
Intermediate Rate	£25,689 - £43,662	21%
Higher Rate	£43,663 - £125,140	42%
Top Rate	Above £125,140**	47%

* Assumes individuals are in receipt of the Standard UK Personal Allowance

** Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000

Inflation, which is above 11% and forecast to remain high in 2023‑24, is disproportionately affecting the lowest income households. The Income Tax policy set out for 2023‑24 therefore seeks to use the limited powers at our disposal to protect public services, while maintaining and enhancing our fair and progressive approach to taxation. As noted above, Income Tax policies since devolution are forecast to raise around £1 billion in 2023‑24, relative to if Scottish Income Tax mirrored policy in the rest of the UK this year.

Not pursuing this package would see significantly less money available in 2023‑24 to support vital priorities such as investing in the NHS and education, and meeting our ambitious targets for child poverty reduction and net zero emissions. It will also enable the Scottish Government to continue supporting the most generous social contract in any part of the UK.

The progressive approach taken for 2023‑24 Income Tax policy means the majority of the additional revenue raised will come from those earning significantly above median earnings in Scotland.

More information on the 2023‑24 policy proposals, including a factsheet^[5] and distributional analysis^[6], 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 2023‑24, and an accompanying explanatory note, is available on the Scottish Government's website.

Forecast

The SFC's forecasts for Scottish Income Tax receipts in 2023‑24 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.

Table 2.02: Scottish Income Tax Revenue Forecasts 2022-23 to 2027-28 ^[7]

£ million	2022-23	2023-24	2024-25	2025-26	2026-27	2027-28
Scottish Income Tax	14,575	15,810	16,633	17,370	18,247	19,437

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.

Policy

We will continue to maintain residential rates and bands at their current level for LBTT. This preserves our progressive system, delivers certainty and stability for taxpayers, and is consistent with the commitment 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. In the period from introduction to the end of September 2022, more than 48,000 first‑time buyers have benefited from the relief, saving up to £600 of tax on the purchase of their first home.

We will also maintain current non‑residential LBTT rates and bands, which remain broadly competitive in a UK context and again provides certainty and stability for taxpayers.

Additional Dwelling Supplement (ADS)

The ADS will increase from 4% to 6%, with effect from 16 December 2022, raising £34 million additional revenue to support public services in Scotland in 2023‑24. This will also support the Scottish Government's commitment to protect opportunities for first‑time buyers in Scotland.

Legislation will be laid in the Scottish Parliament to provide for this. The increased rate will not apply if the contract for a transaction was entered into on or before 15 December 2022. Existing arrangements allowing for the supplement to be reclaimed will continue.

Early in the new year, the Scottish Government will publish a response to the call for evidence and views on the ADS announced in Scottish Budget 2022‑23 and launch a consultation on draft legislation.

Rates and Bands

Rates and bands in 2023-24 will be as follows:

Table 2.03: LBTT Rates and Bands for Residential Conveyances*

Relevant Consideration	Rate
Up to £145,000	0%
Above £145,000 to £250,000	2%
Above £250,000 to £325,000	5%
Above £325,000 to £750,000	10%
Over £750,000	12%

*If the first-time buyer relief applies, the effect is to increase the nil rate band to £175,000.

Table 2.04: LBTT Rates and Bands for Non-Residential Conveyances

Relevant Consideration	Rate
Up to £150,000	0%
Above £150,000 to £250,000	1%
Above £250,000	5%

Table 2.05: LBTT Rates and Bands for Non-Residential Leases*

Net present value of rent payable	Rate
Up to £150,000	0%
Above £150,000 to £2m	1%
Above £2m	2%

*LBTT on lease premiums is payable at the same rates and bands as non-residential conveyances.

In addition, the ADS may apply 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 above. This will apply at a rate of 6% for transactions with an effective date from 16 December 2022, unless the transitional provisions apply.

Forecast

The forecasts for Land and Buildings Transaction Tax revenues are set out in Table 2.06.

Table 2.06: LBTT Revenue Forecasts 2022-23 to 2027-28 ^[8]

£ million	2022-23	2023-24	2024-25	2025-26	2026-27	2027-28
Land and Buildings Transaction Tax	850	773	728	794	910	995
of which:
Residential transactions (excl. ADS)	465	392	360	394	467	524
Additional Dwelling Supplement (ADS)	155	165	151	172	202	216
Non‑residential transactions	229	216	218	228	241	255

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.

Policy

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.

Rates

We will increase the standard rate of SLfT to £102.10 per tonne and the lower rate of SLfT to £3.25 per tonne in 2023‑24, maintaining consistency with UK Landfill Tax increases. These rates are effective from 1 April 2023.

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. This is often referred to as 'waste tourism'.

The credit rate for the Scottish Landfill Communities Fund for 2023‑24 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 to a greater degree than their UK counterparts, without any increase in the overall tax burden.

Forecast

The forecasts for Scottish Landfill Tax revenues are set out in Table 2.07:

Table 2.07: SLfT Revenue Forecasts 2022-23 to 2027-28 ^[9]

£ million	2022-23	2023-24	2024-25	2025-26	2026-27	2027-28
Scottish Landfill Tax	101	79	72	58	16	16

1. Adjusted downwards for payments to the Scottish Landfill Communities Fund (SLCF)

Non-Domestic Rates

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.

Rates

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, and the last revaluation was in 2017.

The next non‑domestic property revaluation will take effect on 1 April 2023, based on rental values as at 1 April 2022 and draft values were published on 30 November 2022. The 2023 Revaluation implements the independent Barclay Review of Non‑Domestic Rates recommendation to move to three‑yearly revaluations and a one‑year tone date. This will ensure that property values more closely align with prevailing property market conditions in Scotland but will make direct comparisons with non‑domestic rates regimes across the UK more challenging due to differences in the respective tone dates.

The main tax rate, the Basic Property Rate or poundage, is a pence in the pound tax rate set by Scottish Ministers. Two additional rates – the Intermediate and Higher Property Rates – are levied on properties with higher rateable values.

The Scottish Budget will protect businesses from the full impact of inflation by delivering a freeze to the Basic Property Rate ('poundage') at 49.8p. This delivers the lowest poundage in the UK for the fifth year in a row and is expected to save ratepayers £308 million compared to an inflationary increase. The average non‑domestic rates bill before any relief is applied will therefore be 10% lower than if there had been an inflationary uplift in the poundage.

We committed in the manifesto to gradually reduce the Large Business Supplement, now the Higher Property Rate, over the course of this Parliament. The Scottish Budget 2023‑24 reduces the number of properties which are liable for the Higher Property Rate, by increasing the rateable value threshold at which this rate applies, from £95,000 to £100,000. The Intermediate Property Rate, at 51.1p (the poundage plus 1.3p), will be charged on properties with a rateable value of between £51,001 and £100,000; the Higher Property Rate of 52.4p (the poundage plus 2.6p) will be charged on properties with a rateable value above £100,000.

Table 2.08: Non-Domestic Rates

Basic Property Rate ('Poundage')	49.8p
Intermediate Property Rate (rateable values between £51,001 and £100,000)	51.1p
Higher Property Rate (rateable value above £100,000)	52.4p

Reliefs

The Budget continues to support our businesses and communities with a generous non‑domestic rates package which takes into account the forthcoming 2023 revaluation.

We have updated the Business Growth Accelerator relief to account for the revaluation and properties in receipt of this relief on 31 March 2023 will continue to be eligible for an equivalent percentage of relief on the new rateable value for the remaining duration of the relief.

To encourage regeneration including in town centres, we are expanding Fresh Start relief by raising the rateable value threshold at which properties qualify for the relief from £95,000 to £100,000. Properties already in receipt of Fresh Start relief on 31 March 2023 will also continue receiving relief for the remaining duration of the relief award regardless of whether the new rateable value is above the new qualifying threshold.

We will reform and extend eligibility for the Small Business Bonus Scheme (SBBS) relief to ensure that it remains the most generous in the UK, delivers the manifesto commitment that 100,000 properties will be taken out of rates altogether, and is more progressive than the current scheme. 100% relief will be available for properties with a rateable value of up to £12,000 and the upper rateable value for individual properties to qualify for SBBS relief will be extended from £18,000 to £20,000. To improve the design of the scheme, we are tapering SBBS relief for properties with a rateable value between £12,001 and £20,000: relief will taper from 100% to 25% for properties with rateable values between £12,001 to £15,000; and from 25% to 0% for properties with rateable values between £15,001 to £20,000. Cumulative rules will remain in place including the £35,000 cumulative rateable value threshold. Car parks, car spaces, advertisements and betting shops will be excluded from eligibility for SBBS from 1 April 2023.

Acknowledging the impact of the revaluation and of reforming the Small Business Bonus Scheme relief thresholds, we will offer a Small Business Transitional Relief to ensure that properties that lose SBBS or Rural rates relief eligibility do so in a phased manner. For those losing or seeing a reduction in these reliefs (including due to the above exclusions introduced for SBBS relief) on 1 April 2023 the maximum increase in the rates liability relative to 31 March 2023 will be capped at £600 in 2023‑24, rising to £1,200 in 2024‑25 and £1,800 in 2025‑26. This will protect an estimated 19,000 properties who will lose some or all their eligibility for SBBS relief or Rural relief.

Revaluations by design redistribute rates liabilities and can therefore create volatility in rateable values. Our commitment to moving to a three‑year revaluation cycle will mitigate these risks in future, but in the context of COVID recovery and the impact of the cost‑of‑living crisis on the commercial property market we are protecting business by introducing a Revaluation Transitional Relief to protect those most affected and cap rates increases up to the next revaluation in 2026. Increases in NDR liabilities due to revaluation will be capped at 12.5% (cash terms) in 2023‑24 for small properties, rising in subsequent years. This relief will ensure that the gross bills of an estimated 84,000 properties are lower in 2023‑24 than they otherwise would have been.

Table 2: Proposed year-on-year Scottish 2023 Transitional Relief caps (%)

Rateable Value	2023-24	2024-25	2025-26
Small (up to £20,000)	12.5	25	37.5
Medium (£20,001 to £100,000)	25	50	75
Large (Over £100,000)	37.5	75	112.5

To support the attainment of our Net Zero targets, and incentivise investment in renewables, we will introduce a non‑domestic rating exemption for prescribed plant and machinery used in onsite renewable energy generation and storage in Scotland from 1April 2023 until 31 March 2035.

We have already announced that Day Nursery Relief, which was due to end on 30 June 2023, has been extended indefinitely, providing certainty and support for the sector.

Enterprise Areas relief will be extended by one year to 31 March 2024.

Empty Property Relief is being devolved to local authorities on 1 April 2023. The devolution of this relief delivers greater fiscal empowerment, enabling councils to administer any support for unoccupied properties in a way that is tailored to local needs. We will also bring forward regulations intended to empower councils to tackle rates avoidance more effectively.

All the other existing NDR reliefs will be maintained in 2023‑24. In total, NDR reliefs are forecast to save ratepayers £744 million in 2023‑24.

NDR reliefs are subject to the domestic subsidy control regime. From 4 January 2023, Subsidy Control Act 2022 will provide the framework for the new UK Subsidy Control regime.

Forecast tax revenues for NDR are set out in Table 2.09

Table 2.09: Scottish Non-Domestic Rates Revenue Forecasts 2022-23 to 2026-27 ^[10]

£ million	2022-23	2023-24	2024-25	2025-26	2026-27	2027-28
Non-Domestic Rates	2,818	3,075	3,080	3,135	3,405	3,286

Council Tax

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 with each Council responsible for setting the tax rate that will apply in their local authority area. This, as well their collection and enforcement responsibilities of mean that council tax provides important financial and administrative accountability to each council.

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.

Aggregates Levy

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 progress work on a devolved replacement for the UK levy, including through the introduction of the necessary legislation in this session of the Scottish Parliament. A consultation to inform the development of proposals for the new tax closed on 5 December 2022. Consistent with the Scottish Approach to Taxation, we will continue to consult and engage with stakeholders to help inform work going forward.

VAT Assignment

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 was due to be implemented in April 2021, but a postponement was agreed between the Scottish and UK Governments 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.