Scottish Parliament pushes through changes to Income Tax Rates and Bands

The draft Scottish budget in December 2017 put forward two new income tax bands (19% and 21%) plus a 1% increase to the top tax rates and a proposal to increase the higher rate threshold for Scottish taxpayers to £44,273. The only change in the final agreed version is to reduce the higher rate threshold starting point to £43,430.

HMRC announced they will address areas where the new Scottish income tax regime will interact with certain aspects of the broader UK income tax system, in particular income tax relief for pension contributions, charitable donations and claiming the marriage allowance.

HMRC also advised that the UK wide 20% tax relief for pension contributions will continue to be available to 19%, 20% and 21% Scottish taxpayers with those paying the 21% being able to reclaim the additional 1% from HMRC.

I attended the “Big Tax Debate” in Edinburgh recently and one of the points expressed was that people might be willing to pay more tax if this meant public services got the benefit of those additional government revenues. This is a source of much needed discussion and debate in these changing times!

The starting higher rate threshold for Scottish taxpayers  is now nearly £3,000 less than for the rest of the UK. The divergence is now significant and we are at an historical moment in the Scottish devolution process.

70% of taxpayers will see their taxes come down but the other 30% will pay more.

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.

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

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.

I 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.

A summary of the new Tax Bands and Rates

The Scottish income tax rates and bands apply to non-savings and non-dividend income of Scottish taxpayers (i.e. salaries, pensions, self-employed profits, property rental profits).

Interest and dividend income of Scottish taxpayers remains subject to income tax based on the main UK rates and bands.                                                                                                                                         

The tax rates and bands that will apply to relevant income of Scottish taxpayers for 2018/2019 are set out below (assuming the personal allowance is available):

 Bands of relevant incomeRate
Starter rate£11,851- £13,85019%
Basic rate£13,851 - £24,00020%
Intermediate rate£24,001 - £43,43021%
Higher rate£43,431 - £150,00041%
Top rateAbove £150,00046%

Scottish taxpayers earning up to £26,000 will not pay any more income tax than other UK taxpayers, and Scottish taxpayers earning less than £33,000 will pay less tax than in the 2017/18 tax year. 

The table below shows, at a high level, the impact of the changes, although it should be noted that individuals’ personal circumstances will vary.

Income2018/19 versus 2017/182018/19 compared to other UK Taxpayers

What defines a Scottish taxpayer?

An individual will be a 'Scottish taxpayer' if he or she:

is UK resident for income tax purposes; and

- has a 'close connection' with Scotland based on the location of his/her place of residence; or

- does not have a 'close connection' with any of England, Northern Ireland, Scotland or Wales, based on place of residence, but spends at least as many days in Scotland as in the rest of the UK combined. 

An individual will be a 'Scottish taxpayer' for the whole of each relevant UK tax year.         

If an individual’s sole place of residence in the UK during a particular tax year is in Scotland, he/she will have a ‘close connection’ with Scotland and therefore be a ‘Scottish taxpayer’.

If an individual has more than one place of residence in the UK during a particular tax year he/she will be a ‘Scottish taxpayer’ if their main place of residence is located in Scotland for at least as long as it is located in any of England, Northern Ireland or Wales.  For these purposes each of England, Northern Ireland and Wales is considered separately.

The fact that an individual might have his/her main place of residence in England but works in Scotland (or vice versa) will not affect ‘Scottish taxpayer’ status.

Individuals who are resident in the UK for tax purposes but do not have a sole or main place of residence there will need to count the days spent in each part of the UK in order to determine whether or not they are subject to the Scottish rates on relevant income.

These individuals will be ‘Scottish taxpayers’ in a particular tax year if they are present in Scotland for at least as many days as they are present in the rest of the UK (i.e. England, Northern Ireland and Wales) taken together.

For individuals whose sole or main place of residence changes to or from Scotland during the course of a tax year, it might not be possible to confirm whether or not they are ‘Scottish taxpayers’ until after that year has ended.

We’re 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 01463 796200.