Scottish Rates of Income Tax - “A More Progressive Tax System or a Tax Divide...”?

23 September 2019

Since the historic introduction of Scottish Rates of Income Tax (“SRIT”) in April 2017, Scottish taxpayers have been subject to alternative levels of Income Tax on non-savings and non-dividend (“NSND”) income than those applied in the rest of the UK. Holyrood effectively proposed a significantly different Income Tax policy than that set by Westminster, and the result saw higher earners pay more Income Tax than south of the border.

It therefore perhaps comes as no surprise that HMRC have recently issued a report outlining the statistics associated with Income Tax Receipts and they confirm that Scottish Income Tax revenues grew by 1.8% in the 2017/18 tax year. It goes on to confirm this growth was driven primarily by an increase in contributions from higher and additional rate taxpayers – those earning above £43,000 in Scotland in that year, with the number of basic rate taxpayers actually decreasing, partly due to many lower-earning taxpayers being taken out of the tax system altogether.

This UK tax divide increased following the ex-Chancellor, Phillip Hammond’s most recent budget, when he adjusted the band for higher rate taxpayers south of the border, so that from April 2019, other UK earners benefit from an uplift in the basic rate tax band. The Scottish Finance secretary, Derek MacKay has confirmed there will be no such adjustment to the Scottish tax bands, and HMRC and the Scottish Fiscal Commission forecast that Income Tax receipts will grow faster in Scotland than the rest of the UK - a direct result of the differences in tax policy.

The following tables summarise current differences in tax rates:

UK

Personal Allowance - up to £12,500 0%
Basic Rate - £12,501 to £50,000 20%
Higher Rate - £50,001 to £150,000 40%
Additional Rate - over £150,000 45%

 

Scotland

Personal Allowance - up to £12,500 0%
Starter Rate - £12,500 to £14,549 19%
Basic Rate - £14,550 to £24,944 20%
Intermediate Rate - £24,945 to £43,430 21%
Higher Rate - £43,431 to £150,000 41%
Top Rate - Above £150,000 46%

 

Applying these rates to someone resident in Scotland, earning say a £100,000 salary, would result in an increased Income Tax liability of £2,050 compared to those living outside of Scotland.  It is also worth pointing out that National Insurance (“NI”) thresholds are married to the UK national rate threshold, the effect of which is a marginal Income Tax and NI rate of 53% on income between £43,430 and £50,000, as compared to a considerably lower 32% south of the border.

So, what does all of this mean? Firstly, HMRC stresses that these statistics are “experimental” meaning that the data is still in the development stage due to the newness of the devolved tax regime. It is however still difficult to fully embrace Donald MacKay’s positive sentiments, when overall it appears that the Scottish economy is growing slower than the rest of the UK, a point which has been acknowledged by the Scottish Fiscal Commission in forecasting a “series of large negative reconciliations for Income Tax over the next few years.”

Boris Johnston’s promise to raise the basic rate tax band threshold to £80,000 rather than the current £50,000 was made before he was elected Prime Minister. If he follows through with this promise, Scottish taxpayers would be looking at paying additional Income Tax of £6,300 compared with their UK counterparts, and you have to wonder if the Scottish Government could then be faced with future budget deficits, as high earners vote with their potentially much reduced pay packets, and seriously contemplate relocating south.

 

By Lisa Tait, Private Client Tax Senior Manager at Anderson Anderson & Brown LLP

To find out more about Lisa and the Private Client Tax Team at AAB, click here

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