6 April 2018 Heralds the Arrival of the New ‘Scottish Tax Year’  – But will it lead to a Scottish tax hangover?

01 March 2018

The Scottish rates of tax for 2018/19 were finalised on 20 February 2018, and so Scotland will shortly begin to charge tax on its resident individuals earnings at very different rates compared to the rest of the UK.

Note that since our last blog on Scottish Taxes, there has been a reduction to the band for the “intermediate” rate, meaning Scottish tax payers will be liable to the higher rate from £43,430, some £2,920 sooner than other UK taxpayers (higher rate starting at £46,350).

The final bands and rates are as follows:-

Income (£)

Name

Rate (%)

Below £11,850*

N/A

0

£11,850** - £13,850

Starter

19

£13,851 - £24,000

Basic

20

£24,001 - £43,429

Intermediate

21

£43,430 - £150,000

Higher

41

Above £150,000***

Top

46

 

*No tax is payable on income below the Standard UK Personal Allowance, which is set by the UK Government.

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

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

 

In terms of numbers, Scottish tax payers earning up to around £30,000 should not see any difference by the change or compared to the 2017/18 rates. They also won’t be any worse off than other UK residents in receipt of the same income.

However, where income exceeds £33,000, there becomes a marked difference in tax payable, ie relative to the rest of the UK as follows:-

Average income

Difference from 2017/18

Difference from rest of UK

 

£33,000

0

-£70

£60,000

-£184

-£924

£90,000

-£484

-£1,224

 

Whilst this may sound simple enough, and all that’s really necessary here is to get the calculator out, crunch the numbers, and resign ourselves to the fact that, if earned income exceeds around £30,000, more tax will be due compared to UK counterparts, it’s just not going to be that simple. Even excluding the fact that dividends from shares, and other investment income will still be taxed under UK rules – and you guessed it, at altogether different tax rates and bands.

HMRC and civil servants have been grappling with some of the initially obvious complexities associated with two different tax regimes about to be applied to the Scottish population, and here’s a few interesting facts arising as a result of the changes:

Pension Contributions

Payments made to a Personal Pension are made net of basic rate tax (20%), and the pension provider will claim back this 20% from HMRC, adding this to the pension pot. So if an individual pays £80 into his pension, the Government contributes £20.

The new Scottish tax basic rate of tax applying in this situation could instead now be 21%. On this basis, you would expect to see Scots receive an adjustment to this basic rate relief at source, so they pay only 79% pension contributions, effectively claiming 21% back from HMRC. However, it has been confirmed that 20% tax relief will simply continue across the board, meaning thousands of individuals would need to make a separate ‘Tax Return’ approach to HMRC to receive the extra 1% tax relief.

Higher and Additional rate tax breaks are still available on pensions, and so those paying higher Scottish taxes, will in effect have a greater incentive to contribute to their pensions, receiving more tax relief than the rest of the UK.

Highest Rate of Marginal Tax and National Insurance rate in the UK

Scottish resident employees earning between £43,430 and £46,350, will now pay 53% tax and national insurance compared to 32% in the rest of the UK. This 53% rate, is actually some 6% higher than someone in England earning £1M a year, who, for example, receives just £1 extra in earnings.

Individuals earning just over £100,000 will also potentially lose 63.5% in tax and national insurance on every pound up to £123,700, as their personal allowance is tapered away to zero, compared with 62% in the rest of the UK.

The impact of all these changes will be far reaching, adding further administrative burdens for employers, and resulting in many Scottish taxpayers not only paying more tax than in the rest of the UK, but worryingly potentially incorrect Scottish tax.

 

We are perfectly placed to help you negotiate these particular Scottish tax challenges. If you would like to explore tax mitigation strategies before, or indeed after 5 April 2018, and challenge us to see if we can narrow the broadening UK/Scottish tax gap for you, please contact Lynn Gracie (lynn.gracie@aab.uk) or your usual AAB contact.

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