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28 Jan 2021

Scottish Budget 2021: what tax changes are coming in April?

Changes are planned for income tax, council tax and business rates

Some income tax thresholds will rise with inflation from April and councils will receive funding to freeze council tax bills in Scotland, under proposals announced today (28 January) in the Scottish Budget.

Other changes include maintaining Land and Buildings Transaction Tax (LBTT) first-time buyer relief and upping public sector pay - plus plans to reduce business rates.

SNP public finance minister, Kate Forbes, announced the changes today, but they will need to be approved by the Scottish Parliament and get royal assent before coming into force when the new tax year begins on 6 April.

The plans may also be affected by announcements in the Westminster Budget, due to take place on 3 March - and, of course, by the ongoing effects of the coronavirus pandemic.

Here, Which? explains the proposed changes in the Scottish Budget for the 2021-22 tax year, and how they could affect your finances.

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Scottish income tax rates for 2021-22

The table below shows the proposed new rates of Scottish income tax for 2021-22, compared to 2020-21 rates.

In today's Budget speech, it was announced that the Scottish tax bands would remain the same and the tax rates would be frozen. However, income thresholds would increase in line with inflation, apart from the top-rate threshold, which will remain at £150,000.

2020-21 tax year2021-22 tax year
Tax bandIncomeTax rateIncomeTax rate
Personal allowance£0-£12,5000%£0-£12,5700%
Starter rate£12,501-£14,58519%£12,571-£14,66719%
Basic rate£14,586-£25,15820%£14,668-£25,29620%
Intermediate rate£25,159-£43,43021%£25,297-£43,66221%
Higher rate£43,431-£150,00041%£43,663-£150,00041%
Top rate£150,000+46%£150,000+46%

Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 they earn over the threshold, meaning that anyone who earns more than £125,140 will pay tax on all income they earn.

These figures assume that the Westminster Budget increases the personal allowance by 0.5% in accordance with inflation, meaning a £12,570 personal allowance for 2021-22 - but this won't be confirmed until 3 March.

What do the changes mean for you?

If they're put in place, Ms Forbes claims the changes will mean all Scottish taxpayers will pay less income tax in 2021-22 than they did in 2020-21 on their current income.

According to Budget documents, those who earn less than £27,939 - which accounts for 54% of Scottish taxpayers - will pay less income tax in 2021-22 than if they lived in the rest of the UK.

Funding for council tax freezes

In past years, Scottish councils have been able to increase council tax levels by up to 3%, however, this year's Budget said it would provide £90m to councils that chose to freeze bills for 2021-22.

This funding is the equivalent of a 3% rise.

It's hoped this will help ease financial pressures on households while the economy continues to be affected by COVID-19.

Proposed housing changes

A number of changes are set to take place in the housing sector.

Temporary LBTT relief will be lifted

In a bid to reignite the property market during the coronavirus outbreak, the Scottish government raised the threshold at which its Land and Buildings Transaction Tax (LBTT) would kick in.

Across first-time buyers, home movers and those purchasing second homes or buy-to-let properties, this meant there was no LBTT to pay up to £250,000.

The Budget confirmed that this will revert back to the normal thresholds from 1 April 2021.

First-time buyers relief to stay in place

While LBTT rates and thresholds for first-time buyers will return to normal from 1 April, the finance minister announced that first-time buyer relief would stay in place.

This allows first-time buyers to reduce the LBTT they pay by up to £600, as it effectively raises the nil-rate band from £145,000 to £175,000.

One to watch: additional dwelling supplement rate

While there are no changes to the additional dwelling supplement rate in the 2021 Budget, the public finance minister said this topic will be consulted on early in the next government - so changes in the future look likely.

This is a supplementary LBTT charge of 4% levied on those who purchase buy-to-let properties or second homes over the value of £40,000.

Affordable housing

Last year's Scottish Budget announced a significant investment into Scotland's affordable housing provision, which was built on in today's Budget proposals. These detailed an additional £667.6m for Scotland's affordable house building programme and £142m to support housing support schemes, including shared equity.

Business rates to be reduced

While the UK government has previously announced a freeze for business rates (also known as non-residential rates) for 2021-22, the Scottish Budget goes further and proposes a reduction of 8p to 49p - making it the lowest poundage in the UK.

This is an unprecedented step, and will reportedly save Scottish ratepayers more than £120m compared to previous plans.

Public sector pay increases

The Budget proposes that those who earn up to £25,000 a year will receive a 3% increase in 2021-22 - up to a limit of £750.

Those with higher salaries will get a 1% pay rise, capped at £800.

Find out more:key points from the 2020 Spending Review and Spending Review small print

Why is the Scottish Budget before the Westminster Budget?

The Scottish Budget usually takes place after the Westminster Budget, as it includes details of the funding the Scottish Parliament will receive.

However, it's taking place first this year - and the same thing happened last year. The Westminster Budget was originally going to take place in Autumn 2020, but due to a surge in coronavirus cases and a national lockdown in England throughout most of November, it was delayed to 3 March 2021.

However, as the SNP needs to get another political party to back its Budget in order for it to go through (more on this below), the Scottish Budget had to be held sooner.

This means that figures used in today's Budget are estimates on what it's thought the Westminster Budget will include, and may change depending on Chancellor Rishi Sunak's announcement.

What must happen for the changes to take place?

If the SNP's draft Budget proposals are approved, they will come into force from 6 April 2021.

As the SNP is a minority party, it needs the support of at least one other political party in order for the Budget to pass - each party will draw up a list of its own demands before agreeing on a deal.

The SNP has struck a deal with the Green Party for the last four Budgets; as part of last year's negotiations, the Budget added funding for a free bus travel scheme for under-19s.

With a little over two months until the start of the new tax year, a deal must be agreed quickly - in the past, the Scottish Budget has taken place much earlier and allowed for around five months of parliamentary scrutiny ahead of the Budget being passed.