The Scotland Act 2016 give the Scottish Parliament much more flexibility in varying tax rates – for example, each of the three rates of tax can be varied by different figures rather than one single figure as set out in the Scotland Act 2012 and as announced on 25 November 2015 when John Swinney, the Finance Minister, set the rate at 10%.
Chapter 5, Section 13 of the Act gives the Scottish Parliament: Power of Scottish Parliament to set rates of income tax and tax bands themselves. However, the Scottish Parliament cannot set different rates for different types of income.
Although the requirement to only set one rate of tax has now been abandoned in favour of more flexibility, the Scottish Parliament must still set rates of tax in whole or half numbers or zero.
An interesting side effect of these new powers is in relation to Capital Gains Tax. Subsection (1) amends section 110(2) of the Scotland Act 1998 (which gives the Secretary of State the power, for social security purposes, to deem an individual a Scottish taxpayer) to reflect the ability for the Scottish Parliament to set the rates of Income Tax and the limits at which these are paid, for the non-savings and non-dividend income of Scottish taxpayers.
Subsections (2) to (5) amend the Taxation of Chargeable Gains Tax 1992 (TCGA). Section 4 of TCGA sets out the rate of Capital Gains Tax (CGT) that an individual pays – this can be affected by the rate of income tax at which an individual is liable.
Currently individuals who pay Income Tax at the higher rate also pay CGT at the higher rate of 28%. As announced at Budget 2016, the UK government will reduce this higher rate to 20% from 6 April this year. As CGT remains a reserved matter for Westminster to ensure that the tax applies equally to all UK individuals, subsections (2) to (5) therefore make amendments to sections 4 and 4A of TCGA to ensure that the rate of CGT that applies to Scottish income taxpayers is calculated by reference to UK income tax limits rather than the Scottish Income Tax limits. So after 6 April 2016, a CGT rate of 20% will apply to a Scottish Income Tax payer if their income exceeds the UK Income Tax higher rate threshold.
This is not a problem for 2016/2017 as the tax bands are the same throughout the UK. However, there could be an issue in 2017/2018 as Nicola Sturgeon, the First Minister, has already indicated that the Scottish Government will not implement the tax band changes announce by George Osborne when he delivered his Budget speech in March 2016. Should that happen, there would be different income tax bands but CGT for Scottish Tax payers would be based on the UK bands.
Interesting times are ahead.
Detail of the Scotland Act 2016 can be found here.
