UK decisions leave SNP facing tricky tax choices

This is a summary of discussions on tax at the recent SNP conference in Aberdeen. You can read our reports of the Labour and Conservative party conferences by clicking on the respective links.

The CIOT also hosted fringe events alongside the Institute for Fiscal Studies at the Labour and Conservative conferences, which you can also find by clicking on the relevant links.

• UK tax cuts unlikely to be replicated
• But 45p reversal removes a potential headache
• Party members back plans to ‘lift’ the personal allowance
• How will the Scottish Government respond?
• Other tax developments

UK tax cuts unlikely to be replicated

The immediate challenge facing Nicola Sturgeon and her Ministers ahead of this December’s budget will be how they plan to respond to the Chancellor’s growth plan, a statement that has increased the prospects of further and wider income tax divergence between Scotland and the rest of the United Kingdom.

The initial proposal three weeks’ ago to abolish the 45p additional rate of income tax was met with swift condemnation by the First Minister, who described the policy as “moral bankruptcy” and added that the Scottish Government would maintain its “progressive” approach to taxation.

Her Deputy (and stand-in Finance Secretary) John Swinney, adopted a more conciliatory tone, acknowledging that the impact of UK decisions on income tax could have knock-on effects for Scotland requiring careful cognisance.

At the Aberdeen conference, both sought to establish clear water between the Scottish and UK tax regimes, with Swinney pledging not to “follow the Tories down the rabbit hole of tax cuts for the rich” and Sturgeon rejecting the idea of “massive hand-outs for the wealthiest”.

But 45p reversal removes a potential headache

As it was, Kwarteng’s decision to backtrack on plans to abolish the 45p rate of tax on the eve of his speech to the Conservative conference in Birmingham has deferred, for the time being at least, what could have been a tricky political and economic challenge for Scottish Ministers.

Over the summer, it had been speculated that higher earners would be asked to pay more, with a source within the SNP quoted as saying tax rises for the well-off were “inevitable”.

This would have been arguably more difficult had the abolition of the 45p UK top rate gone ahead. That decision, when announced, led business leaders to warn that increased divergence would lead to a flight of high earners from Scotland.

While there has been little evidence of such activity to date, the Institute for Fiscal Studies warned of a “more significant impact” in the presence of increased divergence.

But the upcoming cut to the UK basic rate delivers policy challenges of its own.

In the absence of a policy response from the Scottish Government, the change will mean that a central tenet of Scottish Government tax policy – that some Scots are better off because of Scotland’s more progressive income tax regime – will no longer hold true.

From next April, it would mean that no Scottish taxpayer pays less income tax than their peers south of the border, and would lower the level of income at which they begin to pay more income tax from £27,850 to £14,732.

The Scottish Conservatives would like to see the Scottish Government mirror the UK tax cut. This position was branded “predictable, if depressing” by John Swinney in his conference speech, adding that the Conservatives were urging “reckless” tax cuts at the same time as asking for higher public spending.

Party members back plans to ‘lift’ the personal allowance

SNP members have given their signal as to how they would like their party to respond.

On the final day of the conference, a motion proposed by the party’s Dingwall and District branch and agreed by delegates proposed the abolition of income tax for those earning less than the living wage.

The motion proposed the introduction of a ‘nominal’ rate of tax between the personal allowance and “the equivalent Full Timer earnings on the Living Wage”. Thresholds would rise in line with changes to the wage to prevent fiscal drag, and the measure would be ‘revenue neutral’.

In practice, this would mean the introduction of a new zero rate band of tax on earnings between the personal allowance and £21,500 (as the personal allowance is set on a UK-wide basis) and a rebalancing of the tax system to recoup lost revenues higher up the income scale (although this level of detail was not considered).

The proposer of the motion described the measure as “clumsy”, while itshe seconder said that the measure was “not elegant or perfect”, but both said it would help those most in need. They called for an open and honest debate, noting that while fewer people would pay tax as a result, others would have to pay more, rebalancing the burden of taxation on “those with the financial resilience to cope”.

The Fraser of Allander Institute calculated that if the policy were adopted, it would mean 900,000 people being taken out of paying Scottish income tax at a cost of around £3.6 billion.

As reported by the Herald, Deputy First Minister John Swinney said the government was “not bound by party conference decisions” but added that “there needs to be a relationship between people's income and their contribution towards taxation”.

How will the Scottish Government respond?

We will find out how the Scottish Government plans to respond to the UK’s income tax changes will become known on 15 December, when the draft budget for 2023-24 is published.

Ministers will now need to decide whether to tack Scotland’s income tax system more closely to the rest of the UK or to allow the system to stand on its own virtues.

Aside from discussions on income tax, there was little of tax note on the main agenda. But the Scottish Parliament’s legislative programme for the year ahead provides us with clues as to the areas of tax policy that will be on the agenda.

Other tax developments

The UK decision to lift the starting threshold for the nil rate band of stamp duty land tax (SDLT) and the first time buyer nil rate band will not apply to Scotland, where power over the tax is fully devolved. Ministers may choose to change Land and Buildings Transaction Tax in response, although the SNP’s 2021 manifesto pledged to retain existing rates and bands for the duration of the current parliament.

New legislation introducing the devolved replacement for UK Aggregates Levy, as well as powers to let local authorities introduce a tax on tourists were announced in September. Proposals to strengthen parliamentary scrutiny of tax legislation are also hoped for, with the work of the Devolved Taxes Legislation Working Group expected to reconvene. The prospects of Council Tax reform by the next election seem remote, with a planned Citizens’ Assembly to consider options for reform unlikely to leave sufficient time for legislation to be enacted this side of May 2026.