Normally our office has its Christmas lunch on the second last Thursday before Christmas.  For some reason this was changed to the 21st this year which meant I was able to watch the speech by the Scottish Finance Minister Derek Mackay in its entirety.  If I have to suffer this again I will have a couple of Red Bulls handy but if I record it, I will make a bit of cash on the side by selling it as a guaranteed insomnia remedy.

I appreciate that budgets are hard to make entertaining but raising or lowering the voice an octave would help in making them listenable.  Perhaps it was a cunning plan to ensure that everyone’s attention had wandered before he delivered the bit we were all waiting for – how much extra those in Scotland are going to pay in tax.

It had been heavily trailed that we were going to see an increase in tax, however, the SNP had painted themselves into a corner by saying they were going to freeze the level of basic rate tax at 20%.  So what cunning plan would our financial genius come up with?

He started by proudly announcing a new tax band that would be 19% of the first £2,000 earned above the personal allowance.  This he trumpeted meant that those with incomes below £26,000 were the lowest tax payers in the United Kingdom.  Indeed – by a maximum of £20!  Yes, we have the cost of introducing a new tax band to effectively give half of the population less than 40p a week more income.  I suspect it would have been cheaper to send everyone a £20 note in the post.

This preceded his announcement of a new “intermediate” tax band of 21% that would be paid on income between £24,000 and the new higher rate threshold of £44,273.  This he suggested meant they had kept their promise of freezing the basic rate band at 20%.  Really?  Has it not been shrunk by 60%?  I think anyone earning more than £26,000 will find they are paying more tax even though they were “basic rate” tax payers.

So rather than simply put 1p on basic rate tax we now have three tax bands, two of which have been brought in for political reasons.  A “bugger’s muddle” as my mother would have said.

This led on to his announcing the new rates for those that pay higher and additional rate tax of 41% and 46% respectively.  Now most taxes can be abbreviated to acronyms of their name.  VAT, CGT, IHT are perfect examples.  I am not sure I will be able to do this with Scottish Higher Income Tax!

Now the important thing about this tax is that it is only payable by those that have non-savings, non-dividend income which means that if you can pay yourself dividends you can avoid the Scottish Higher Income Tax.  Therefore in reality the new tax bands only apply to those with earned, pension or self-employed income.  If this is you, this means you are in the Scottish Higher Income Tax.

Making this only 1% higher than the UK rates is unlikely to create mass emigration south of the border but if the plan is to increase this much more the Scottish Higher Income Tax could well hit the fan.

Of course this still has to pass parliament and there may well be changes to what was announced and among the things we do not know is how this will impact on Scots that make pension contributions.  Will they be able to get relief at 41% or 46%, never mind 21%.  No doubt this will all have been thought through and cleared up when the bill is printed in its entirety….

So on that cheery note I would like to thank you for the kind words throughout the year and that your Christmas and 2018 is a good one.

Steve Forbes
Managing Director
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This letter is the personal view of Steve Forbes. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

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