The last couple of years have seen a great deal of change in Scotland – devolution continues to evolve and with the fiscal framework discussions now concluded, more is to come. On top of all this, we have the Scottish Parliament elections looming.

Against this backdrop, many tax practitioners will be wondering: what's next for income tax rates and council tax in Scotland?

Well, little in the short term it would appear. In February, Holyrood voted 74 to 35, under its new powers over income tax for Scottish taxpayers, to keep rates the same as in the rest of the UK for 2016/17. John Swinney's announcement at the Scottish budget in December that the Scottish Government didn't plan to use its powers to vary the rate was not unexpected. The current system requires the rates to go up or down across all tax bands, so any increase to the rate of tax paid by higher earners would also raise taxes for lower-paid workers. The rate applies to non-savings and non-dividend income e.g. employment income and property income.

However, under the Scotland Bill proposals, which are currently going through the UK Parliament, Holyrood will be given greater control to vary income tax rates and bands. The thresholds for each band of income tax can be changed, and the rates at which they're taxed can vary. This will allow more targeted tax adjustments. 

We can expect further details in the manifestos for the Scottish elections in May outlining what, if anything, the parties would do with these powers, if elected. But here's what we know so far:

  • The SNP has stated it will make use of the new powers, but the party has not yet given any detail as to how. John Swinney has stated previously he would not have cut the 50p additional rate. Changes to council tax have been announced which would see a rise in tax for the 25% of the population in bands E and above. It is also proposed that the council tax freeze will end in 2017 giving councils the power to put up charges by up to 3%. Plans for council tax revaluations and local income tax will not go ahead.;
  • Scottish Labour has argued for a 1p rise from April 2016 across all tax bands, but with a rebate for those earning less than £20,000. Scottish Labour also supports the UK Labour Party's call for the additional rate of income tax to be increased from 45p to 50p. This could apply from April 2017 if the Scotland Bill is enacted;
  • The Scottish Liberal Democrats have stated they also want a 1p increase, with the proceeds to be spent on education. The expected economic benefits and increased tax revenues from that investment would be used to fund a zero-rate band over and above the current tax-free annual allowance;
  • A Scottish Conservative-appointed commission, which reported in January, recommended that the total tax burden should not be higher in Scotland than it is in the rest of the UK. The commission proposed an intermediate banding, of perhaps 30p, for a tranche of earnings between the standard and higher rates and has urged that the additional rate not be increased.

The new income tax powers will not come into force until April 2017, at the earliest, and will be accompanied by greater powers over welfare and borrowing, control over half of all VAT raised in Scotland and the devolution of air passenger duty. No change can happen before that date using the existing powers are the Scottish rate of income tax must be set for a full year.

Through all of this, we know that change is coming. What that looks like and when it is implemented remain, for the most part, unknown quantities for now. But businesses should keep an eye on the political agenda, as a clearer picture emerges in the weeks and months ahead.

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