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 2018.
In this blog Joanne Walker, CIOT and LITRG technical officer, takes a look at some of the effects.
Unlike 2017/18, when the only divergence from the rest of the UK was in terms of the threshold at which individuals start to pay higher rate tax on their earned income, 2018/19 will see more significant change to the structure of Scottish income tax.
There will be a five-band structure, with the basic rate band effectively having been split into three – the starter, basic and intermediate rate bands. The additional rate band is renamed the top rate band, and the higher and top rates each increase by one percentage point, to 41% and 46% respectively.
As in 2017/18, there continues to be a difference in the higher rate threshold from that in the rest of the UK. The higher rate threshold for Scottish taxpayers, in respect of earned income (including rents), will be £43,430 for 2018/19, assuming eligibility for the personal allowance. In the rest of the UK, the higher rate threshold will increase to £46,350 from 6 April 2018, which is also the threshold that will apply to Scottish taxpayers in respect of their savings and dividend income.
Non-savings and non-dividend income includes income such as employment salary, income from pensions, profits from self-employment and rental profits. In the remainder of this blog we refer to “earned income” as a convenient shorthand for non-savings and non-dividend income.
The Scottish rates and bands for income tax from 6 April 2018 are set out below:
|Scottish income tax rates 2018/19||Scottish income tax bands 2018/19|
|Scottish starter rate - 19%||£11,851 - £13,850 (£2,000)|
|Scottish basic rate - 20%||£13,851 - £24,000 (£10,150)|
|Scottish intermediate rate - 21%||£24,001 - £43,430 (£19,430)|
|Scottish higher rate - 41%||£43,431 - £150,000|
|Scottish top rate - 46%||£150,001 and above|
While Scottish taxpayers with earned income of less than £26,000 in 2018/19 will pay less income tax than taxpayers in the rest of the UK earning the same level of income, this tax reduction is relatively small, at a maximum of £20 for the year. Scottish taxpayers with earned income of more than £26,000 will pay more income tax than taxpayers in the rest of the UK earning the same level of income.
A Scottish taxpayer with total income of £45,000 (assuming this is all earned income) will have a tax liability of £7,134 in 2018/19 (personal allowance of £11,850; £2,000 at 19%; £10,150 at 20%; £19,430 at 21%; £1,570 at 41%); meanwhile, a taxpayer subject to the UK rates and bands will have a tax liability of £6,630 (personal allowance of £11,850; £33,150 at 20%). A difference of £504.
A Scottish taxpayer with total income of £100,000 (assuming this is all earned income) will have a tax liability of £29,684 in 2018/19 (personal allowance of £11,850; £2,000 at 19%; £10,150 at 20%; £19,430 at 21%; £56,570 at 41%); meanwhile, a taxpayer subject to the UK rates and bands will have a tax liability of £28,360 (personal allowance of £11,850; £34,500 at 20%; £53,650 at 40%). A difference of £1,324.
These points of divergence may also create some complexities for Scottish taxpayers.
Scottish and UK Income tax
Since the Scottish rates and thresholds apply to earned income only, a Scottish taxpayer who has both earned income and taxable savings income, such as bank interest, and/or dividend income 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. This complexity also arose in 2017/18.
By way of example, a Scottish taxpayer with earned income of £45,000 and savings income of £2,000 in 2018/19 will have to work out their tax liability as follows. Their total income is £47,000, but this is reduced to £35,150 by their personal allowance (47,000 – 11,850). This means they have to pay income tax on £33,150 of their earned income (45,000 – 11,850), according to the Scottish rates and bands – so at 19% on £2,000, at 20% on £10,150, at 21% on £19,430 and at 41% on £1,570. 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 £34,500 – the taxable earned income, subject to Scottish income tax, has used up £33,150 of this band, leaving £1,350. Firstly, the taxpayer is entitled to the personal savings allowance; since their total taxable income is £47,000, 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 UK basic rate band. So, of the remaining £1,500 of taxable savings income £850 is taxable at the UK basic rate of 20%, and £650 at the UK higher rate of 40%. By means of a sense check, we can see that this is correct, as the total taxable income of £47,000 exceeds the UK higher rate threshold of £46,350 by £650.
Capital gains tax
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.
National Insurance contributions
In addition to income tax, employment income and self-employment profits are generally subject to National Insurance contributions (NIC). These have their own rates and bands, but the Upper Earnings Limit for Class 1 NIC and the Upper Profits Limit for Class 4 NIC are aligned with the higher rate threshold set by the UK Parliament – £46,350 for 2018/19.
As a consequence, Scottish taxpayers with earned income that is subject to NIC will find themselves paying a joint Scottish income tax – NIC marginal rate of 53% (if employed) or 50% (if self-employed) on earned income that falls between the Scottish higher rate threshold of £43,430 and the UK higher rate threshold of £46,350. UK taxpayers will not face this ‘spike’.
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.
If the higher earner is a Scottish taxpayer in 2018/19, and has total taxable income between £43,430 and £46,350, 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.
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 £43,430, they would be eligible for the Marriage Allowance.
It should be noted that there was a concern that all Scottish taxpayers would be excluded from the Marriage Allowance, because of the introduction of the starter rate band. However, the UK Parliament will legislate for consequential amendments to ensure that the Marriage Allowance is available to Scottish taxpayers who pay tax at the starter rate, basic rate or intermediate rate. Such consequential amendments have often been used to amend UK legislation in situations like these.
Pension contributions tax relief and Gift Aid tax relief
Concerns have been raised about how tax relief on personal pension contributions and Gift Aid contributions will operate, both from the point of view of Scottish taxpayers and pension providers and charities, under a five tax rate band structure.
Currently, charities do not have to identify whether or not a donor is a Scottish taxpayer – they simply claim tax relief at 20% from HMRC on Gift Aid donations. It appears that this will continue to be the case. Scottish taxpayers who pay tax at a rate higher than 20% will be able to claim extra tax relief. As always with Gift Aid, it is essential for a taxpayer to have paid enough tax during the tax year to cover the amount of tax relief claimed by the charity.
Scottish taxpayers who make pension contributions under net pay arrangements have their pension contributions deducted from their pay before income tax is applied. This means that they will continue to receive tax relief automatically at their marginal rate of tax.
From April 2018, it was the intention that pension providers using the relief at source mechanism would claim tax relief at the correct basic rate for Scottish taxpayers and apply it to their contributions. The creation of the starter and intermediate rate bands had caused concern about whether this approach could continue.
Currently, with a three rate band structure in 2017/18, a Scottish taxpayer claims higher rate or additional rate tax relief on pension contributions through the extension of the basic rate and higher rate bands.
HMRC have indicated that for 2018/19 pension providers will continue to claim tax relief at 20% for Scottish taxpayers.
Pension providers will also continue to claim tax relief at 20% in respect of Scottish taxpayers who make personal pension contributions and who are liable to income tax at no more than the Scottish starter rate of 19%, or who pay no tax. HMRC will not recover the difference between the Scottish starter and Scottish basic rate.
Scottish taxpayers who are liable to income tax at the Scottish intermediate rate of 21% will be entitled to claim the additional 1% tax relief due on some or all of their contributions. If they already complete a tax return, they can do this through self assessment. Otherwise, they will need to contact HMRC.
Scottish taxpayers who are liable to income tax at the Scottish higher rate (41%) and Scottish top rate (46%) will be able to claim additional relief on their contributions up to their marginal rate of tax in the usual way, either through self assessment or by contacting HMRC.
HMRC are continuing to consider how to approach tax relief on pension contributions under relief at source for tax years 2019/20 onwards.
PAYE tax codes
HMRC have published separate Scottish payroll tax tables for tax years 2016/17 onwards, to deal with the different Scottish higher rate threshold and now the five rates and bands of Scottish income tax. This will continue for 2018/19, and will hopefully allow the PAYE system to deal with Scottish taxpayers who have typical ‘L-suffix’ tax codes, such as S1185L.
HMRC have indicated that new codes will be introduced into the PAYE coding system in order to deal with Scottish taxpayers who have multiples sources of PAYE income, i.e. those that currently have BR and D0 codes.
Points to note
Although the Scottish Parliament has set rates and thresholds for income tax payable by Scottish taxpayers on certain types of income, 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.
If you are a Scottish taxpayer and have PAYE income, you should have a Scottish PAYE tax code (an “S” pre-fixed code).
The Low Incomes Tax Reform Group (LITRG) is currently updating its Scottish income tax guidance in respect of the new rates and thresholds, and this will appear in the ‘tax basics' section in April.
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 status, but it will be decisive in many cases.