Scottish Budget likely to hit middle and higher earners – BDO

The Scottish Government has little room for manoeuvre as it publishes its spending plans in the 2017-2018 Draft Budget on 15 December, but likely changes to Income Tax and Land and Building Transaction Tax (LBTT) could have a significant impact, according to accountants and business advisers BDO.

The firm predicts that changes to the Income Tax rates and bands are likely, given the Scottish Government has already said that the earnings level at which the 40% rate of income tax is paid will be lower in Scotland than the rest of the UK.

This means those north of the border with earnings starting in the mid £40,000s will pay tax on some of their earnings at 40%, while the rest of the UK will pay the 20 per cent rate.

Martin Bell, head of tax at BDO in Scotland, believes First Minster Nicola Sturgeon and Finance Minister Derek Mackay have a dilemma on their hands as they seek to deliver their progressive agenda in a post-Brexit world.

He said: “This time last year, the inflexible nature of the Scottish income tax rate setting power was cited as the reason for keeping the Scottish Rate of Income Tax (SRIT) at the same level as the rest of the UK. However, that inflexibility has now gone and the Scottish Government can act if it wishes to achieve its stated policy of making income tax on employment, self-employment and pension income earned by Scottish residents better reflect “the taxpayer’s ability to pay”.

“The safe option is not to stray too far from the UK taxing model at least for the time being, but I would not be surprised to see a new rate applying to the highest earners and progressive increases for those earning more than £50,000 a year.”

There could be tough times ahead for those in this income bracket as they are also likely to be affected by the recent vote by MSPs to increase the top four bands of council tax in Scotland from April 2017.

Going into its third year, Land and Building Transaction Tax (LBTT) may see changes to certain bandings that many within the industry have been campaigning for.

James Paterson, property tax expert at BDO, said: “We could see an increase in the 5% LBTT band to £500k given the reduced activity being reported at the £325-£750k level in the residential market. Current LBTT annual yields are £355m and £230m on residential and non-residential property transactions respectively and are expected to rise to £545m and £260m by 2020-21, assuming of course a continued increase in house prices at current levels. However, additional significant LBTT yield will be tricky to achieve without adversely affecting the volume of property transactions.”

Further details of the proposed changes to Scottish Air Passenger Duty from April 2018 are also likely, although opinions are divided on whether encouraging people to fly from Scottish airports will actually provide the predicted boost to the Scottish economy, rather than making it cheaper for Scots to go abroad and spend their money in a foreign land.

Mr Bell added: “It is highly likely that the Scottish Government will seek to identify and implement more tax gathering measures over the course of its current term but, as we fast approach the new financial year, there are tough choices to be made. There’s a real balancing act between raising revenue to deliver social objectives, and keeping businesses and their entrepreneurial owners onside by avoiding excessive taxation. It will be interesting to see how they address this.”