Budget Bill Stage 1 – What are the changes to income tax?

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What was proposed at Stage 1?

Stage 1 of the Budget Bill for 2018-19 was debated at Holyrood yesterday afternoon.  The Government reached a deal with the Scottish Green Party to increase the resources available in the Scottish budget.

We will publish three blogs on the Budget on SPICe Spotlight today – this blog on income tax, a blog looking at the revised budget in the round, and a blog looking at the local government settlement.

On the tax side, the Government made a change to its 2018-19 income tax proposals and set the higher rate threshold lower than initially proposed (£43,430 instead of £44,273). Note the higher rate in the rest of the UK for 2018-19 is £46,350, almost £3,000 higher than in Scotland.

Table 1 shows the proposed rates and bands for 2018-19.

Table 1 – Rates and bands, 2018-19

Name

Rate

Band

Draft Budget 2018-19

Stage 1

Starter

19%

11,850*

Basic

20%

13,850

Intermediate

21%

24,000

Higher

41%

44,273

43,430

Top

46%

150,000

* This assumes individuals are in receipt of the Standard UK Personal Allowance

In both 2016-17 and 2017-18 income tax had three main bands (basic, higher and additional) with the higher rate threshold at £43,000. For 2018-19 the Government initially proposed a new five-band income tax structure with a higher rate threshold at £44,273. This would have marked an increase of 3.0% in the higher rate threshold (equal to CPI inflation in September 2017).

Yesterday the Government proposed to set the higher rate threshold at £43,430, which marks a 1% increase on last year (Table 2).

Table 2: Change in higher rate threshold

  Higher rate threshold Annual increase CPI as at September the previous year
2016-17

£43,000

0.0%

-0.1%

2017-18

£43,000

0.0%

1.0%

2018-19

£43,430

1.0%

3.0%

If wages go up by more than tax thresholds, this leads to “fiscal drag” whereby earners eventually move up to higher tax rates – though the rising cost of living may mean their spending power is not rising.

How much will it raise?

The Scottish Government has said this change would raise an additional £55 million compared to its initial proposals made in the Draft Budget 2018-19. This figure is a preliminary Scottish Government estimate based on the assumption that behavioural responses will be the same as under the initial proposals. The final forecast figure will be determined by the Scottish Fiscal Commission.

What is the effect on your take-home pay?

Below we consider the impact on take-home pay for different levels of earnings compared to last year, 2018-19 rest of UK and 2018-19 initial Scottish Government proposals.

Table 2: Annual impact on take-home pay at different income levels

  Compared to 2017-18 Scotland Compared to 2018-19 rest of UK Compared to 2018-19 Scottish Government Draft Budget 2018-19 proposals
15,000

 90

 20

 –

20,000

 90

 20

 –

25,000

 80

 10

 –

30,000

 30

-40

 –

35,000

-20

-90

 –

40,000

-70

-140

 –

45,000

-34

-504

-169

50,000

-84

-824

-169

60,000

-184

-924

-169

70,000

-284

-1,024

-169

80,000

-384

-1,124

-169

90,000

-484

-1,224

-169

100,000

-584

-1,324

-169

150,000

-1,343

-1,943

-169

250,000

-2,343

-2,943

-169

500,000

-4,843

-5,443

-169

Higher and top rate taxpayers will pay £169 more  compared to the Government’s initial proposals for 2018-19. Scottish taxpayers earning under £33,000 will pay less tax in 2018-19 than 2017-18; and those earning under £26,000 will pay less tax in Scotland than in the rest of the UK in 2018-19.

Under the Government’s initial proposals, those earning over £43,525 and up to £58,500 would have paid less tax than in 2017-18. This is no longer the case with the higher rate threshold at £43,430.  However there are still some small anomalies – for example people earning £45,000 will still see a smaller increase in tax than those earning £40,000.

What about Marriage Allowance and national insurance contributions?

A higher number of people will be paying the “53% rate”, equal to their top marginal rate of income tax plus their national insurance contributions (Table 3). This is 21 percentage points higher than taxpayers in the rest of the UK at the same income level. See SPICe briefing Draft Budget: Taxes for more information.

Table 3: Marginal rates and national insurance contributions (NICs), 2018-19

  Up to 8,453 8,453 to 11,850 11,850 to 13,850 13,851 to 24,000 24,001 to 43,430 43,431 to 46,350 46,351 to 100,000
Scotland: income tax 0% 0% 19% 20% 21% 41% 41%
Rest of UK: income tax 0% 0% 20% 20% 20% 20% 40%
NICs 0% 12% 12% 12% 12% 12% 2%
Scotland : income tax + NICs 0% 12% 31% 32% 33% 53% 43%
Rest of UK: income tax + NICs 0% 12% 32% 32% 32% 32% 42%

On Marriage Allowance, the Scottish Government stated last month that following discussion with the UK Government, agreement had been reached that those Scottish taxpayers who fall into the new starter rate, Scottish basic rate or intermediate rate will continue to be eligible for Marriage Allowance. Though the higher rate at £43,430 had not yet been proposed when this agreement was reached, it seems likely the situation will be the same now that it has.

Anouk Berthier, Senior Researcher, Financial Scrutiny Unit