Scottish resident taxpayers should note 15 December 2016 in their diaries now. That is the date when the Scottish government will confirm whether 2017/18 Scottish income tax rates and thresholds are to diverge from the UK model.

Employers will watch with particular interest as it is they who will have to administer any income tax changes for their Scottish employees. 

Background

Scottish taxpayers already pay Scottish tax rates on their non-savings income (income from employment, self-employment, pensions and rents) but not on their company dividends or interest income.

In 2016/17 there was a single Scottish rate of income tax of 10%, the same as the element of each UK tax rate which it replaces. This means that Scottish income tax rates were identical to the rates of 20%, 40% and 45% applying in the rest of the UK.

A Scottish taxpayer is an individual who lives in Scotland for the relevant tax year.

What happens next?

The structure of UK tax rates will be completely different in 2017/18, with Scottish tax rates being charged on all the non-savings and non-dividend income of Scottish taxpayers rather than on just a tranche of their income as at present.

Scottish tax rates are set by the Scottish government which will announce the rates for 2017/18 on 15 December 2016. Personal allowances will continue to be set at a UK level, but the Scottish government can change tax rates and rate thresholds on relevant income. 

Possible changes

In March 2016 the Scottish government said its proposed income tax policy was to ‘increase the higher rate threshold of income tax in line with inflation in 2017/18 and by no more than inflation in the following years, maintain the additional rate threshold, and maintain the basic rate at 20p, the higher rate at 40p, and the additional rate at 45p.’ 

New tax rates could be introduced as happened when Land and Buildings Transaction Tax (LBTT) replaced Stamp Duty Land Tax (SDLT) on Scottish land transactions in 2015.

But even what has already been proposed is radical. If the Scottish 2017/18 higher rate income tax threshold increases only in line with inflation it will become £43,387, whereas Philip Hammond confirmed in his autumn statement that the UK threshold for 2017/18 will increase from £43,000 to £45,000.

Impact on taxpayers

All Scottish taxpayers liable to higher and additional rate tax on non-savings income would pay an extra £323 in income tax if the Scottish government sets the 2017/18 higher rate threshold at £43,387 rather than £45,000.

Basic rate Scottish taxpayers would be unaffected unless their non-savings income falls between the Scottish threshold of £43,387 and the UK threshold of £45,000, in which case they too would pay more tax.

Divergent income tax rules in different parts of the UK will greatly increase complexity. We live in interesting times!