Scottish Income Tax – where are we now? 

Since April 2016, the Scottish Government has exercised its power under the Scotland Act 2012 to set its own rate of tax on the income of a Scottish taxpayer and from 6th April 2016, Scottish taxpayers “benefited” from the lowest income tax rate in the UK, of 10%. The inverted commas have been used because in real terms, no-one actually saw any difference! The UK income tax rates of 20, 40 and 45% set by Westminster had been reduced by an equivalent ten per cent for Scottish taxpayers so there was no real increase or decrease overall, certainly as regards 2016/17 tax year.

The following tax year was slightly different however, and our MPs, dipping their legislative toes ever deeper into the water then made the historic decision to set separate Scottish income tax rates and bands for the first time. Tax rates were frozen, as were income tax bands so whereas the rest of the UK saw an increased basic rate band limit of £45,000, it remained at £43,000 in Scotland.

Scottish income tax

Whilst it might seem that a freeze is often a good thing, where the freeze is on allowances or tax bands then, unfortunately, it isn’t. It wouldn’t have made any difference to anyone paying tax at the lower or basic rates in 2017/18 but it did mean that higher rate taxpayers in Scotland would hit the £43,000 threshold – and therefore start paying the higher rate of tax – sooner than a taxpayer in the rest of the UK. So Scottish higher rate taxpayers would be paying more tax than their English counterparts, to the tune of £400 (being the difference between the thresholds, at 20%) from 6th April 2017.
However, as if differing tax bands wasn’t enough, with the passing of the Scottish Budget in February 2018, the Scottish Government brought in 5 tax bands, as opposed to the 3 that the rest of the UK have to get by on. These are as follows:

                                     Rate %    banding
Starter Rate                      19     £11,851 - £13,850
Basic Rate                         20     £13,851 - £24,000
Intermediate Rate         21     £24,001 – £43,430
Higher Rate                      41     £43,431 - £150,000
Top Rate                            46     £150,001 +

Scottish tax rates will, for the first time ever, then, be appreciably different to those in the rest of the UK. As to the impact, well, according to the Scottish Government, compared to elsewhere in the UK, those earning less than £26,000 will pay slightly less income tax next year than if they lived elsewhere in the UK. Compared to 2017-18, for a given level of income, every Scottish taxpayer earning less than £33,000 in 2018-19 will pay less income tax than they did in the previous year; overall, 70% of Scottish income tax payers will pay less tax in 2018-19 compared to the previous year and, when considering current basic rate taxpayers, 81% will pay less next year than they did this.
However, whilst there is no doubt that many Scottish taxpayers will be better off than they were before, there is no getting away from the fact that a significant number will be worse off, not only in terms of their position in the previous year but also as regards a similar earning individual elsewhere in the UK.

All happening in a pay packet near you from 5th April 2018……..

Posted 12/04/18

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