Scottish income tax rates and thresholds – what do the changes mean for Scottish taxpayers?

The Scottish Parliament has confirmed the rates and thresholds for income tax that will apply to the non-savings and non-dividend income of Scottish taxpayers from 6 April 2017. We take a look at some of the effects.

The only divergence from the rest of the UK is in terms of the threshold at which individuals start to pay higher rate tax on their earned income. The basic rate band has been set at £31,500, which means the higher rate threshold for Scottish taxpayers, in respect of non-savings and non-dividend income, will be £43,000 for 2017/18, assuming eligibility for the personal allowance. This means the higher rate threshold will be frozen at the current (2016/17) level. In the rest of the UK, the higher rate threshold will increase to £45,000 from 6 April 2017, which is also the threshold that will apply to Scottish taxpayers in respect of their savings and dividend income. The basic rate, higher rate and additional rate of tax will all be the same as those that apply in the rest of the UK: 20%, 40% and 45%

The Scottish rates and bands for income tax from 6 April 2017 are set out below:

The obvious result of this difference is that Scottish taxpayers may face an additional tax liability of up to £400 by comparison with taxpayers in the rest of the UK. A Scottish taxpayer with total income of £45,000 (assuming this is all non-savings and non-dividend income) will have a tax liability of £7,100 in 2017/18 (personal allowance of £11,500; basic rate band of £31,500 at 20%; £2,000 at 40%); meanwhile, a taxpayer subject to the UK rates and bands will have a tax liability of £6,700 (personal allowance of £11,500; basic rate band of £33,500 at 20%).

This single point of divergence may also create a few complexities for Scottish taxpayers.

Complexities

Since the Scottish rates and thresholds apply to non-savings and non-dividend income only, a Scottish taxpayer who has both earned income, such as employment salary, pension, profits from self-employment or rental profits, and taxable savings income, such as bank interest may have to consider both the UK rates and thresholds and the Scottish rates and thresholds in order to work out their income tax liability.

Example

By way of example, a Scottish taxpayer with earned income of £43,500 and savings income of £2,000 in 2017/18 will have to work out their tax liability as follows. Their total income is £45,500, but this is reduced to £34,000 by their personal allowance (45,500 – 11,500). This means they have to pay income tax on £32,000 of their earned income (43,500 – 11,500), according to the Scottish rates and bands – so at 20% on £31,500 and at 40% on £500. They also have £2,000 of taxable savings income. Now, they have to consider the UK rates and bands, while also taking into account the income that is taxable according to the Scottish rates and bands. Note that the UK basic rate band is £33,500 – the taxable earned income, subject to Scottish income tax, has used up £32,000 of this band, leaving £1,500. Firstly, the taxpayer is entitled to the personal savings allowance; since their total taxable income is £45,500, their marginal rate of tax in terms of the UK rates and bands is the higher rate. This means they are entitled to a personal savings allowance of £500 meaning no tax is due on the first £500 of savings income; this also uses up £500 of their basic rate band. So, of the remaining £1,500 of taxable savings income £1,000 is taxable at the UK basic rate of 20%, and £500 at the UK higher rate of £500. By means of a sense check, we can see that this is correct, as the total taxable income of £45,500 exceeds the UK higher rate threshold of £45,000 by £500.

In addition, the rates of capital gains tax depend on the UK rates and thresholds. So, a Scottish taxpayer with both earned income and capital gains may also have to consider both UK and Scottish rates and thresholds.

The above are two of the more obvious complexities that could arise for some.

Marriage Allowance

Other, perhaps less anticipated consequences, may arise. The Marriage Allowance (more information on the LITRG website)] is available to married couples and civil partnerships, where one party has some unused personal allowance in a tax year and the other party does not pay tax at any rate other than the basic rate.

It would appear, that if the higher earner is a Scottish taxpayer in 2017/18, and has total taxable income between £43,000 and £45,000, on which they pay Scottish income tax at the higher rate, they are not eligible for the Marriage Allowance. Whereas, if they paid tax according to the UK rates and thresholds, they would be eligible, as they would only be paying tax at the basic rate.

It is possible to apply for the Marriage Allowance after the end of the tax year. This means that taxpayers who are not sure whether or not they will be eligible during the tax year may still have the chance to benefit from this relief, once they have established their total income for a particular tax year. This is subject to them still being married at the time of a later claim – and if one of the couple has died, a claim will be denied.

In addition, it may be possible for a Scottish taxpayer in this position to extend their basic rate band by making Gift Aid donations or pension contributions. If, as a result of such payments, they do not actually pay any higher rate tax, even though their total income is above £43,000, they would be eligible for the Marriage Allowance.

 Points to note

Although the Scottish Parliament has set rates and thresholds for income tax payable by Scottish taxpayers on certain types of income, HM Revenue & Customs (HMRC) continue to collect and administer all income tax. This means that if you have any questions about your income tax, you should continue to contact HMRC.

HMRC sent letters to Scottish taxpayers in late 2015, prior to the introduction of the Scottish rate of income tax (SRIT) in April 2016. In addition, if you are a Scottish taxpayer and have PAYE income during 2016/17, you should have a Scottish PAYE tax code (an “S” code).

The definition of a Scottish taxpayer is the same for the Scottish rates and thresholds as it is for SRIT. The Low Incomes Tax Reform Group (LITRG) is currently updating its guidance in respect of the new rates and thresholds, and this will appear in the ‘tax basics’ section in April.

Scottish rate of income tax (SRIT)

During the current tax year, (2016/17), people who live in Scotland pay the SRIT. This only applies to non-savings and non-dividend income. Because of the way the SRIT works, and because the rate was set at 10%, the tax rates for Scottish taxpayers are the same as those for taxpayers elsewhere in the UK.

LITRG explains what the SRIT is, how it works and who has to pay it in its tax basics section.

Important

It is important to make sure that HMRC have your correct and up-to-date address. This is not the only factor in determining Scottish taxpayer, but it will be decisive in many cases.

Blog by Joanne Walker, Technical Officer, the Chartered Institute of Taxation 

(please use form at http://www.litrg.org.uk/contact-us or follow us on Twitter: @LITRGNews

 

 

 

 

Posted in: Scotland; HMRC, All
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