Changes to Scottish Income Tax Rates - What employers and employees need to know

Chris Campbell

Chris Campbell

Tax Senior Manager

It was confirmed last week that Scottish income tax rates and bands will change from 6 April 2018.

The Scottish Government has announced that there will be 5 rate bands for Scottish taxpayers to apply to non-savings and non-dividend income for the 2018/19 tax year:

  • Starter rate - 19% on earnings between £11,850 and £13,850
  • Basic rate - 20% on earnings between £13,851 and £24,000
  • Intermediate rate - 21% on earnings between £24,001 and £43,430
  • Higher rate - 41% on earnings between £43,431 and £150,000
  • Additional rate - 46% on earnings above £150,000

Individuals and employers should now consider what these changes will mean for them.

We would recommend that employers make plans to communicate to employees the implications of this change, particularly if you if have a mobile workforce.Employees seconded to the UK from abroad will tend to be tax “equalised” by reference to their home country tax rates, so that they are not out of pocket when on secondment. Scottish employers who second staff from outside the UK (and possibly within) should consider their policies and procedures in this area.

Whilst these changes will generally benefit lower earning employees, employers should be aware that the new rates could give unexpected results for middle income earners who may pay a higher marginal rate of tax than those elsewhere in the UK when National Insurance is considered. 

National Insurance is not devolved to the Scottish Parliament and the Upper Earnings Limit has, in recent years, aligned to the UK higher rate Income Tax threshold.  This means that, in the 2018/19 tax year, the 12% rate of Employee’s Class 1 National Insurance will apply on earnings up to £46,350.  For those earning above £46,350, the Employee’s Class 1 National Insurance rate will reduce to 2%.

To illustrate the position, a Scottish taxpayer would pay 41% Income Tax and 12% Employee’s Class 1 National Insurance on earnings between £43,431 and £46,350, a 53% effective marginal tax rate. Taxpayers in the rest of the UK would pay Income Tax at 20% instead of 41% on the same band of earnings. 

The position becomes more complex for employees throughout the UK repaying Student Loans, who would also be repaying loans at a rate of 9% and those receiving Child Benefit, who would see the tapered withdrawal of their Child Benefit entitlement via the High Income Child Benefit Charge if their earnings exceed £50,000.

Whilst the rules on the withdrawal of the Personal Allowance apply throughout the UK, the 41% Scottish higher rate will mean that Scottish taxpayers earning over £100,000 a year will pay an effective marginal tax rate of Income Tax of 61.5% (compared to 60% for the rest of the UK).  When National Insurance is taken into account, this will lead to an overall marginal tax rate of 63.5% (62% in the rest of the UK). 

The recent changes could present a potential tax planning opportunity for employers to structure the salary packages for employees in a different way and employers may wish to consider alternative tax efficient ways to remunerate their staff. 

This could include childcare vouchers (only available up to April 2018 for new entrants), payments to pension schemes, cycle to work or other qualifying salary sacrifice schemes.

For more details about how the recent changes could affect your business, please contact any member of the Employer Solutions Team.