The Scottish parliament is to take over responsibility for income tax and welfare benefits in the most significant devolution of taxes thus far.
Changes to the management of income tax and other taxes, as published by the Smith Commission last week, are listed below. Any reference to a tax being “reserved” means it will be controlled by the UK parliament:
Income Tax
- Income Tax will remain a shared tax and both the UK and Scottish Parliaments will share control of Income Tax. MPs representing constituencies across the whole of the UK will continue to decide the UK’s Budget, including Income Tax.
- Within this framework, the Scottish Parliament will have the power to set the rates of Income Tax and the thresholds at which these are paid for the non-savings and non-dividend income of Scottish taxpayers (as defined by the Scotland Acts).
- As part of this, there will be no restrictions on the thresholds or rates the Scottish Parliament can set. All other aspects of Income Tax will remain reserved to the UK Parliament, including the imposition of the annual charge to Income Tax, the personal allowance, the taxation of savings and dividend income, the ability to introduce and amend tax reliefs and the definition of income.
- The Scottish Government will receive all Income Tax paid by Scottish taxpayers on their non-savings and non-dividend income with a corresponding adjustment in the block grant received from the UK Government, in line with the funding principles set out in paragraph 95.
- Given that Income Tax will still apply on a UK-wide basis, albeit with different rates and thresholds in Scotland, it will continue to be collected and administered by HMRC. In line with the approach taken for the Scottish rate of Income Tax, the Scottish Government will reimburse the UK Government for additional costs arising as a result of the implementation and administration of the Income Tax powers described above.
National Insurance
All aspects of National Insurance Contributions will remain reserved.
Capital Taxes
All aspects of Inheritance Tax and Capital Gains Tax will remain reserved.
Corporate Taxes
All aspects of Corporation Tax will remain reserved.
All aspects of the taxation of oil and gas receipts will remain reserved.
Value Added Tax
The receipts raised in Scotland by the first 10 percentage points of the standard rate of Value Added Tax (VAT) will be assigned to the Scottish Government’s budget. These receipts should be calculated on a verified basis, to be agreed between the UK and Scottish Governments, with a corresponding adjustment to the block grant received from the UK Government in line with the principles set out in paragraph 95.
All other aspects of VAT will remain reserved.
Air Passenger Duty
The power to charge tax on air passengers leaving Scottish airports will be devolved to the Scottish Parliament. The Scottish Government will be free to make its own arrangements with regard to the design and collection of any replacement tax, including consideration of the environmental impact.