Scottish taxpayers are exposed to more complexity and potential confusion than ever before because of the introduction of new rates and bands of income tax from today, tax professionals have cautioned.
The Chartered Institute of Taxation (CIOT) said the start of the new tax year brought with it a number of challenges for Scottish taxpayers that will include grappling with as many as five new rates and bands of income tax and ensuring that they continue to receive the correct amount of pension tax relief.
In addition, the Institute highlighted the continuing anomaly that will result in some middle-income earners paying a higher marginal rate of tax and National Insurance (NI) than those on higher incomes.1
Moira Kelly, Chair of the Chartered Institute of Taxation’s Scottish Technical Committee, said:
“Today is the day that taxpayers across Scotland will really start to notice the impact of tax devolution on their pay packets as a result of the introduction of new rates and bands of Scottish income tax.2
“By introducing a new 19p starter rate and a new 21p intermediate rate – as well as increasing the higher and top rates of tax – every Scottish taxpayer who gets their income from a salary, a pension, renting a home or profits from self-employment will now be exposed to as many as five different rates and bands of tax.
“Complexity was always going to be the price to pay for having control over parts of the income tax regime. While the differences next year may not be huge, they are noticeable and they expose Scottish taxpayers to increasing levels of complexity and potential confusion than ever before.
“It has never been more important for Scottish taxpayers within the PAYE system to make sure that their tax code starts with an ‘S’. This means that HMRC has identified them as a Scottish taxpayer and should prevent any unwelcome surprises – such as finding out that they have paid too little tax – further down the road.
“Scottish taxpayers should continue to be eligible to receive Marriage Allowance worth up to £238 a year where applicable3 but for those paying into their pension under ‘relief at source’ arrangements, they may be entitled to extra tax relief if they pay income tax at a rate higher than the basic rate. They can get this either by phoning HMRC to ensure that this is included in their tax code or by completing a self-assessment tax return at the end of the year.
“The misalignment between devolved income tax and UK-wide National Insurance will also result in the anomaly of some middle-income earners paying a higher marginal rate of tax and NI – equivalent to 53% of their income – than some on higher incomes.
“Things get even more complicated for Scots who also get savings or dividend income. They now face the prospect of having to check both the UK and Scottish rates and bands of income tax to work out what they owe.
“The nature of our tax system already makes it very difficult for the public to understand what they pay and when they pay even before these extra complexities came into effect. It is a timely reminder of the need to move the debate on the devolved taxes away from simply working out what we will pay and when we pay it, but also to consider how these choices interact with the wider UK tax regime.”
Notes for editors
- In 2018/19, an employed Scottish taxpayer earning between £43,430 and £46,350 per year will pay a marginal rate of tax of 53% (income tax and national insurance) compared with a lower marginal rate of 43% for an employed Scottish taxpayer earning between £46,351 and £100,000.
- The Scottish Parliament has the power to set rates and bands of income tax for non-savings and non-dividend income (such as rental profits, pensions or salaries). It has no control over income tax on savings income or dividends, nor does it decide who and what can be taxed (the tax base) or set the tax-free personal allowance. Similarly, taxes such as National Insurance, Capital Gains Tax (CGT) and Corporation Tax are fully reserved to the UK Parliament.
- An agreement between the UK and Scottish Government’s means that taxpayers impacted by the introduction of the starter and intermediate rates of tax will continue to receive Marriage Allowance (MA). MA is not available across the UK where one of the spouses pays tax at the higher or top rates of income tax. In Scotland, the higher rate threshold for 2018/19 is £43,430.