Budgetary effects on Scotland
ith consumer price inflation at an all-time high of 3.1 per cent and employee productivity remaining persistently low, the draft Scottish Budget was heralded as an initiative to invest in public services, support business and kickstart productivity.
As a means of supporting these changes, Finance Minister Derek Mackay was expected to employ newly devolved powers to raise income tax across the country.
Following his speech last Thursday, individuals will be interested in some notable proposals which might have an impact on their ability to save.
These include an intermediate rate of 21 per cent proposed on earnings between £24,000 and £44,273 alongside a planned increase of 1p on the existing higher and additional rates of tax.
While proposed amendments to income tax and the waiving of the land and buildings transaction tax (LBTT) for first-time buyers up to £175,000 might provide some limited relief to the finances of some younger people and lower earners, the proposed tax changes with higher inflation will mean anybody earning above £33,000 will see their finances squeezed and be worse off as a result.
The additional tax bands will also have wider implications for the economy as the divergence between Scottish fiscal policy and the rest of the UK widens.
These initial steps set a precedent for Scotland, giving Holyrood the power to make changes to the bands and raise income tax further in future. There is an assumption underlying the Budget that economic growth, aided by additional investment in infrastructure, renewable energy and city region deals, will limit the need for future tax rises. If this proves illusory, additional demands could be placed on Scotland’s middle and higher rate taxpayers.
It’s worth noting that the UK capital gains tax and dividend regimes will not be affected by these changes, creating a more complex environment for Scottish savers and investors.
Financial advisers across Scotland will probably see an influx of requests for clarification on the proposed amendments regarding what people are entitled to, how best to make full use of the allowances and reliefs and, crucially, how the diverging tax systems will interact in practice, for example with regard to relief on pension contributions.
A key point to remember is that this Budget has been proposed by a minority government so will probably see amendments and will not be fully approved until February.
In the meantime, what stays and what does not will be cause for plenty of discussion among savers, financial planners and economists alike.
If these changes are accepted, they will have a direct impact on the finances of Scottish savers ,so they would be wise to start preparing now. ● Paul Embleton is head of the Edinburgh office at Brown Shipley