Alan Stewart

Steady as she goes rather than full steam ahead…

Since the Chancellor’s Autumn statement, inflation and interest rates have fallen faster than expected with the economy expected to grow, albeit slowly, in the coming months. The tax burden however remains high with tax as a percentage of GDP close to record levels. It was with this economic backdrop that the Chancellor delivered his budget on 6 March – probably the last major fiscal announcement before the upcoming general election.

National insurance decreases…

Following the previous Autumn Statement, class 1 NIC was reduced by 2% from 6 January 2024 and at the same time class 2 NIC was abolished and class 4 NIC reduced from 9% to 8% from April 2024. The Chancellor went further in his Budget and announced that the main rate of employee NIC will be reduced by a further 2% to 8% and class 4 NIC will reduce from the planned 8% to 6%.

Although the Scottish government has devolved power to set tax rates and bands on non-savings and dividend income, NICs are not devolved and the NIC reductions will benefit both Scottish employees and self-employed taxpayers.

North-east of Scotland oil and gas industry pays for tax cuts in the Budget…

In advance of the Budget announcement there was concern within the north-east of Scotland oil and gas energy sector over the harm being done by the Energy Profits Levy which was increased by the Chancellor to 35% from January 2023 and is set to run until March 2028.

While the Treasury has benefited from increased taxation, the impact on the north-east of Scotland’s economy has been severe with it now expected to lag well behind the rest of Scotland over the next three years.

In his Budget statement the Chancellor announced the windfall tax would be extended by an additional 12 months to March 2029 raising an expected £1.5 billion in extra tax revenue.

However, the levy will no longer be applied should oil and gas prices return to historical normal prices for a sustained period of time. Damage has already been suffered by the oil and gas sector and the extension of the levy will continue the uncertainty and may well result in further reductions in investment and increased job losses.

Scottish drink industry…

In the Chancellor’s Autumn statement, excise duties were frozen until August 2024 and there was further cheer for the industry with the duty freeze being extended to February 2025. This measure will benefit both the hospitality industry and alcohol producers.

Scottish property sector…

The Chancellor announced the end of the furnished holiday let tax regime which provided tax advantages to taxpayers with holiday lets. From April 2025 short and long term lets will be treated separately with the Chancellor hoping that this will promote more long term lets of properties.

There was also a change made to the higher rate of tax paid on the sale of a residential property with the rate of capital gains tax being reduced from 28% to 24% from 6 April 2024 while the tax rate for basic rate taxpayers will remain at 18%.

UK government funding for Scottish towns and cities…

Peterhead, Arbroath and Kirkwall will receive £20 million of levelling up funding from the UK government to promote growth and community regeneration in their area over the next 10 years. Perth and Dunfermline will both receive £5 million from the levelling up fund for cultural or regeneration projects and the city of Dundee will benefit from £2.6 million investment in the V&A museum to expand its showcasing of Scottish design.

The budget announcements will result in extra Barnett consequential funding for Scotland of £295 million. Early indications are that this money will be used by the Scottish Government towards social housing rather than reducing the personal tax burden on Scottish taxpayers.

Non domicile changes…

Scottish taxpayers who are non-UK domiciled and only pay tax on UK sourced income and gains will be impacted by the announcements in the budget. The tax advantage they enjoy in not being taxed on overseas income and gains will come to an end from 6 April 2025 when there will then be a new residence based regime introduced where, if the new arrival has been non-resident for 10 consecutive years, there will be a four year period before the taxpayer will pay tax on all income and gains.

Other announcements…

Scottish businesses whose turnover was threatening to go over £85,000 will benefit from the increase in VAT registration thresholds increasing from £85,000 to £90,000 from 1 April 2024.

There was also reform to the child benefit regime as the higher income child benefit charge will start to be levied from £60,000 instead of £50,000 from 6 April 2024 with full claw back at an upper threshold of £80,000 instead of £60,000. The threshold is to be measured against household income from April 2026 to make the changes fairer.

Scottish taxpayers will benefit from two new saving products, the British Savings Bond and a UK ISA which will allow taxpayers to invest a further £5,000 tax free in UK businesses over and above the annual £20,000 ISA limit. The savings bonds however will involve locking your money away for a period of three years which might not be attractive to all investors.

There were no major announcements on corporation tax however it was confirmed that full expensing would be made permanent for companies subject to corporation tax and consideration would also be given, when fiscal conditions allow, to extending it to assets for leasing. This will be a welcome support for the leasing sector.

With limited fiscal headroom, significant tax cuts to stimulate growth in the economy were not on the agenda other than some vote pleasers in the form of the NIC cuts for workers and self-employed taxpayers.

The Chancellor had no scope to steam ahead with major tax cuts and growth initiatives and must hope that his attempts to make work pay by “unleashing people power” will be enough.

Alan Stewart is a tax partner at accounting firm MHA’s Aberdeen office