New Scottish Rates of Income Tax now in effect

Susie Walker

Susie Walker

Partner and Head of Tax and Brexit Team

The Scottish Government has flexed its devolved financial powers to introduce new Scottish income tax rates and bands, coming into effect from today, the 6th of April.

In Finance Minister Derek Mackay's reformed taxation structure,  we will now see 5 rates bands for Scottish taxpayers, to apply to non-savings and non-dividend income for the 2018/19 tax year.

Here's a reminder of the 5 rates and bands:

  • 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. 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. 

Many Scottish business owners operate via a limited company. They pay corporation tax on their profits and income tax on the dividends they take out of the company. It is important to note that the rates and bands for income tax on dividends is unaffected by the Scottish Tax changes as dividend taxes are administered by HMRC using rates set by the UK government.

Going forward, taxpayers must ensure that changes to their circumstances that cause them to become, or cease to be, a ‘Scottish taxpayer’ is notified to HMRC. For advice on what consitutes a Scottish Taxpayer, read our blog on the same subject here.

As always, we are here to help. If you need advice or guidance on how the new Scottish Income Tax rates might affect you or your business, contact  John Todd on Tel: 01463 796200.