Scottish Budget: 2024 to 2025

Chapter 3 Tax Policy

Context

The Autumn Statement made it clear that the UK Government is prioritising tax cuts ahead of public services, with the Institute for Fiscal Studies saying ‘the tax cuts are paid for by planned real cuts in public service spending’. As a result of decisions made by the UK Government, our total Block Grant is almost £1 billion lower in real terms for 2024‑25 than the latest 2022‑23 position.

In Scotland, we are deciding to make different choices.

We are choosing to use our limited set of devolved tax powers to raise additional revenue for the Scottish Budget to enhance the funding available to support our vital public services and social contract for and with the people of Scotland.

That is why we have taken targeted tax decisions, carefully balancing the needs of individuals, businesses and the wider economy, whilst ensuring we continue to build upon our progressive approach to taxation.

The latest Scottish Fiscal Commission (SFC) forecasts show a significant improvement in our economic and tax performance, driven by higher earnings growth in Scotland, with all regions of Scotland seeing earnings grow faster than the UK average in early 2023. This is positive news and Scottish Income Tax is expected to make a record contribution to Scottish Government funding in 2024-25, with Scottish Income Tax receipts forecast to increase by £1.5 billion since 2023-24.

Our approach

In May 2023, the Deputy First Minister set out the Government’s Medium Term Financial Strategy (MTFS) to achieve sustainable public finances. The strategy comprises three pillars – focusing public spending on the Government’s three missions; achieving sustainable, inclusive economic growth with focus on generating tax revenues; and maintaining and developing our strategic approach to tax.

The Deputy First Minister’s commitment to publishing our longer-term approach to tax policy alongside the MTFS in 2024, will be an opportunity to consider the role of the tax system in the wider fiscal and economic landscape, and will build on the approach to taxation set out in our Framework for Tax (December 2021)^[3].

The MTFS pillar on taxation also included a commitment to wider engagement on tax policy, building on our inclusive approach to policymaking. This includes our annual pre-budget engagements with stakeholders and the wider public, which is set out in detail in Scottish Budget 2024-25 – Attitudes to Tax: Public Engagement.

Income Tax

The Scottish Parliament has the power to set the Income Tax rates and bands for the non‑savings, non‑dividend income of Scottish taxpayers. Responsibility for the remainder of the Income Tax system, which includes all reliefs and exemptions, and setting the UK‑wide Personal Allowance and associated taper rate, is reserved to the UK Parliament. Income Tax on savings and dividends income is also reserved. National Insurance is also an area that cannot be determined by the Scottish Government and is reserved.

Policy

The decisions we have made on tax, since the devolution of powers, continue to raise significant additional revenue for the Scottish Budget. On Scottish Income Tax specifically, the SFC estimate that the decisions we have made since 2017‑18, including decisions made for this Budget, will add around £1.5 billion of revenue in 2024‑25, compared to implementing the rates and bands applicable elsewhere in the UK.

Scottish Income Tax policy for 2024-25 will continue to build on our progressive approach to taxation, while raising additional revenue to invest in our vital public services. These decisions have been taken against a backdrop of continued high inflation and severely constrained funding settlements from the UK Government, who have chosen to prioritise tax cuts at the expense of investing in public services.

We have not taken our decisions on tax lightly and we recognise the challenging economic conditions that many people and businesses are facing. That is why we are asking those who are best able to contribute more to pay more for a purpose.

For 2024‑25, the Starter and Basic rate bands will be increased by inflation to £14,876 and £26,561 respectively. The Starter, Basic, Intermediate and Higher rates will remain unchanged. The Higher rate threshold and Top rate threshold will remain unchanged. A new Advanced rate will be added at a rate of 45p applying to income over £75,000. An additional 1p will be added to the Top rate, increasing the rate from 47p to 48p on income over £125,140. These changes are proposed to take effect from the start of the tax year on 6 April 2024 when there will be six bands in the Scottish Income Tax system.

The SFC estimate that introducing the new 45p Advanced rate band and increasing the Top rate by 1p will raise an additional £82 million in 2024-25. The Scottish Government estimate that freezing the Higher rate threshold in 2024-25 has added an additional £307 million to the Scottish Income Tax forecast, relative to it increasing in line with CPI inflation of 6.7 per cent^[4].

Policy on rates and thresholds will continue to be set annually as per our legislative requirements.

*Assumes individuals are in receipt of the Standard UK Personal Allowance.

**Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

The progressive approach that has been taken for 2024‑25 Scottish Income Tax policy means that all of the additional revenue raised will come from those earning significantly above median taxpayer income in Scotland^[5]. The new Advanced rate band will affect only the top 5 per cent of Scottish taxpayers earning above £75,000.

Scottish Rate Resolution

The Scottish Parliament must pass a Scottish Rate Resolution each year to set the rates and bands for Scottish Income Tax. A draft of the motion and an accompanying explanatory note is available on the Scottish Government’s website.

Forecast

The SFC’s forecasts for Scottish Income Tax receipts in 2024-25 determine the revenue that the Scottish Government will be able to draw down from HM Treasury during the year ahead. Forecasts for Scottish Income Tax receipts are set out in Table 3.02.

Land and Buildings Transaction Tax (LBTT)

LBTT applies to residential and non-residential land and buildings transactions (including commercial leases) where a chargeable interest is acquired. The Additional Dwelling Supplement (ADS) is payable, as part of LBTT, on purchases of all relevant residential properties for £40,000 and above.

Policy

We will maintain residential rates and bands at their current level and continue the first ‑time buyer relief, preserving the progressive system.

The ADS will also continue to be charged at six per cent. Following consideration of responses to the consultation on legislative change announced in Scottish Budget 2023 ‑24, the Scottish Government will introduce legislation to the Scottish Parliament to provide for various amendments to the ADS, including to extend the timelines for the ADS, to address concerns about certain scenarios involving joint buyers and extend the scope of residential LBTT relief for local authorities .

We will also maintain current non-residential LBTT rates and bands, which remain broadly competitive in a UK context.

Rates and Bands

Rates and bands in 2024-25 will remain as below.

*If the first-time buyer relief applies, the effect is to increase the nil rate band to £175,000.

*LBTT on lease premiums is payable at the same rates and bands as non-residential conveyances.

For relevant transactions, in addition to these rates and bands the ADS may apply at a rate of six per cent.

Forecast

The forecasts for LBTT revenues are set out in Table 3.06:

*Figures may not add due to rounding.

Scottish Landfill Tax (SLfT)

SLfT applies to the disposal of waste to landfill, charged by weight on the basis of two rates: a standard rate; and a lower rate for less polluting materials.

Policy

SLfT rates are intended to provide a financial incentive to support a more circular economy, and the delivery of ambitious targets to reduce waste, increase recycling and cut waste going to landfill.

The SLfT arrangements also encourage landfill site operators to make a financial contribution to community and environmental projects through the Scottish Landfill Communities Fund (SLCF). Landfill operators can voluntarily contribute a capped proportion of their landfill tax liability to the SLCF and claim 90 per cent of the contribution as a tax credit.

Rates

We will introduce legislation to increase from 1 April 2024 the standard rate of SLfT to £103.70 per tonne and the lower rate of SLfT to £3.30 per tonne, maintaining consistency with planned UK Landfill Tax increases. This will provide a stable tax environment, whilst addressing concerns over the potential for waste to be moved from or to Scotland should one part of the UK have a lower tax charge than another.

Landfill operators will remain able to contribute a maximum of 5.6 per cent of their tax liability to the SLCF in 2024-25.

Forecast

The forecasts for SLfT revenues are set out in Table 3.07:

*Adjusted downwards for payments to the SLCF.

Non-Domestic Rates

Non-domestic rates (NDR), often described as business rates, are a local tax levied on lands and heritages used for non-domestic purposes in the public, private and third sectors. NDR are administered and collected by local authorities, who ultimately retain all the NDR revenue they raise to help fund the local services they provide. National NDR tax rates and reliefs are confirmed annually by the Scottish Government.

Rates

The amount of tax due is based on the rateable value of the property multiplied by the Basic Property Rate (‘poundage’), the Intermediate Property Rate, or the Higher Property Rate, depending on the property’s rateable value, minus any reliefs which the property is in receipt of. The rates are set by Scottish Ministers.

Independent Assessors set the rateable value of a non-domestic property, which is based on the notional annual rent the property would attract on the open market if vacant and to let. Non-domestic properties are periodically revalued to reflect prevailing economic circumstances. The last revaluation took effect on 1 April 2023, based on a tone date of 1 April 2022. We have introduced three yearly revaluations with a one-year tone date, to ensure that rateable values more closely align with property market conditions. The next revaluation is scheduled for 1 April 2026 with a tone date of 1 April 2025.

In November 2023, 35 major business representative organisations wrote to Scottish Ministers requesting no increase to the poundage in the coming financial year. The Scottish Budget will support businesses by freezing the Basic Property Rate, which is charged to properties with a rateable value up to and including £51,000, at 49.8p. This delivers the lowest Basic Property Rate in the UK for the sixth year in a row and is expected to save ratepayers £37 million compared to an inflationary increase which would have delivered a Basic Property Rate of 53.1p.

The other rates will rise by inflation: the Intermediate Property Rate, which applies to properties with a rateable value of between £51,001 and £100,000, will be charged at 54.5p; the Higher Property Rate of 55.9p will be charged on properties with a rateable value above £100,000.

We continue to ensure that over 95 per cent of non-domestic properties, those with a rateable value up to and including £100,000, are liable for a lower property tax rate than anywhere else in the UK.

Reliefs

This Budget continues to support our businesses and communities with a strong NDR relief package including maintaining the most generous small business rates relief and Business Growth Accelerator relief in the UK and a number of other reliefs including Day Nursery and Fresh Start reliefs, which do not exist in England.

Recognising the specific challenges faced by the hospitality sector in island communities, we will offer 100 per cent relief in 2024-25 for hospitality businesses located on islands as defined by the Islands (Scotland) Act 2018, capped at £110,000 per business. We remain committed to working with the hospitality sector, in the New Deal for Business Non-Domestic Rates sub-group, on the long-term issues that have been raised by this sector.

We will continue to offer support to encourage investment in renewable district heating networks by extending 90 per cent renewables District Heating relief until 31 March 2027, and expanding this to include not only new networks, but all district heating networks, where at least 80 per cent of the thermal energy generated derives from renewables.

Enterprise Areas relief, currently due to end on 31 March 2024, will be phased out over the next two years as set out in Table 3.09. This will offer a transitional period of support for those businesses who have been supported by this relief.

Telecommunications mast relief will be extended from 31 March 2029 to 31 March 2031.

The Budget will also maintain all other existing NDR reliefs in 2024‑25. This includes the multi-year transitional relief schemes announced in Budget 2023-24 and introduced to protect those properties which saw the biggest increases in rateable values at the 2023 revaluation. These transitional reliefs will offer the following in 2024-25 and ensure that the gross bills of an estimated 20,000 properties are lower than they otherwise would have been:

• Revaluation Transitional Relief will cap annual increases in NDR liabilities due to revaluation in cash terms at 25 per cent for small properties with rateable values up to £20,000, 50 per cent for those with rateable values between £20,001 and £100,000 and 75 per cent for those over £100,000.
• Small Business Transitional Relief will ensure that for those properties that lost or saw a reduction in Small Business Bonus Scheme relief, or Rural rates relief eligibility, due to revaluation, the maximum increase in the rates liability per property relative to 31 March 2023 will be capped at £1,200.
• For parks, or parts of parks, that existed but were not rateable on 31 March 2023, and which became rateable on 1 April 2023, Parks Transitional Relief will provide 33 per cent relief.

In total, NDR reliefs are forecast to save ratepayers £685 million in 2024-25^[6].

On 1 April 2023 we delivered greater fiscal empowerment with the devolution of Empty Property Relief, and any local relief for unoccupied properties in 2024-25 will remain at the discretion of individual councils, enabling them to reflect local needs and circumstances.

NDR reliefs are subject to the domestic subsidy control regime as set out in the Subsidy Control Act 2022.

Forecast tax revenues for NDR from 2024-25 are set out in Table 3.10 below. The balancing of the NDR pool will be paused in 2024-25 and will recommence over a three-year period in 2025-26.

Prior year adjustments in a given year are the difference between the Provisional Contributable Amount (PCA) of NDR income for the preceding year, provided by councils at the start of the financial year (this is separate to the NDR income forecast for that year provided by the Scottish Fiscal Commission and featuring in Table 3.10), and the NDR income outturn for the preceding year. The yearly balance in each year is the sum of prior year adjustments for that year, and of the difference between the PCA and the Distributable Amount for that year.

*The distributable amount is set before the start of the financial year, based on the forecast of NDR income and adjustments for previous years.

**The provisional contributable amount is reported by councils at the start of the financial year, after annual NDR bills are issued to ratepayers.

***The outturn NDR income, reported after the end of the year.

Council Tax

Council Tax is a local tax, with receipts retained by local government and separate from the Scottish Budget. It makes a significant contribution to the funding of public services. Every household in Scotland potentially has a Council Tax liability, although the Council Tax Reduction scheme reduces this for over 460,000 households according to their need and ability to pay.

The Scottish Government has committed to working in partnership with Local Government to deliver a national freeze on Council Tax in 2024-25. We have engaged closely with COSLA to discuss the parameters and principles for identifying funding to support this commitment and will continue discussions during the coming months to reach agreement.

Air Departure Tax

The Scottish Government remains committed to introducing Air Departure Tax (ADT) and continues to explore all options to implement the tax in a way that protects Highlands and Islands connectivity and complies with the UK Government’s subsidy control regime. We will also review the rates and bands of ADT prior to its implementation to ensure they are aligned with our world-leading climate ambitions. The UK-wide Air Passenger Duty will continue to apply in Scotland until ADT is implemented.

Scottish Aggregates Tax

The Scotland Act 2016 gave the Scottish Parliament the power to introduce a devolved tax to replace the UK Aggregates Levy in Scotland. The UK levy is paid on the commercial exploitation of aggregates, in essence, crushed rock, sand and gravel.

The Aggregates Tax and Devolved Taxes Administration (Scotland) Bill, which was introduced to Parliament in November 2023, makes provision for a Scottish Aggregates Tax. If this Bill is enacted and the necessary secondary legislation is approved by the Scottish Parliament, the Scottish Government intends that introduction of a Scottish Aggregates Tax will occur on 1 April 2026.

VAT Assignment

The Scotland Act 2016 allows for the first 10p of standard rate VAT receipts and the first 2.5p of reduced rate VAT receipts raised in Scotland to be assigned to the Scottish Government (known as VAT assignment). As VAT receipts for Scotland are not identifiable from tax returns, assigned VAT will be based on a model of expenditure in Scotland.

The 2023 Fiscal Framework Agreement with UK Government outlines that once completed and agreed by officials the assignment methodology and operating arrangements will be presented for joint UK and Scottish Government ministerial sign-off.

New taxes

As set out in the 2023-24 Programme for Government, the Scottish Government is seeking the timely transfer of powers to introduce a devolved Building Safety Levy, equivalent to the UK Government’s Building Safety Levy for England. The revenues from the Levy will be used to fund the Scottish Government’s Cladding Remediation Programme, which, together with the Cladding Remediation Bill, will help to safeguard homeowners and residents by remediating unsafe cladding that presents a risk to life.

The Scottish Government will continue to work with COSLA and local authorities to scope their request that councils be given the discretionary power to introduce a Cruise Ship Levy. We are exploring if such a levy can be included in the Visitor Levy Bill or another legislative vehicle this parliamentary session. However, significant work will be required throughout 2024-25 to engage with businesses and other relevant stakeholders, in line with the New Deal for Business, to ensure that such a levy is introduced effectively. In keeping with previous statements to parliamentary committee we will not delay passage of the Visitor Levy (Scotland) Bill given its importance to ensuring sustainable tourism infrastructure for Scotland.

In 2024-25, the Scottish Government will work with our partners in COSLA and local government, and other stakeholders, to examine how further policy measures – regulatory and fiscal – can support existing policies and interventions to improve a wide range of land management outcomes, including the restoration of peatlands and the creation of more woodlands. This will also include consideration of a proposal for a Carbon Emissions Land Tax, as has been suggested by the John Muir Trust.

Recognising the importance of sustaining the public finances and public services, we are also committed to exploring the reintroduction of a non-domestic rates Public Health Supplement for large retailers in advance of the next Budget, while continuing work over the coming year to explore an Infrastructure Levy, to be implemented by spring 2026.

Footnotes

1 https://www.gov.scot/publications/framework-tax-2021/

2 In May 2022, the SFC made a technical assumption that the Higher Rate Threshold would remain frozen in all future years. This assumption about freezing the Higher Rate Threshold in the baseline means it is already in the SFC’s forecasts and this policy decision does not score as a policy measure in their report.

3 This is currently forecast to be £28,200 in 2024-25.

4 Note that this figure relates to reliefs funded by the Scottish Government. It does not include contributions made by councils to discretionary reliefs or reliefs that are fully devolved to councils.