Scottish income tax rates and thresholds for 2022/23 – what do they mean for Scottish taxpayers?
The Scottish Government has proposed the rates and thresholds for income tax that will apply to the non-savings and non-dividend income of Scottish taxpayers from 6 April 2021. In this blog Joanne Walker, CIOT and LITRG technical officer, takes a look at some of the effects.
The Scottish Parliament introduced a five-band structure of Scottish income tax in 2018/19, setting the tone for greater divergence between the Scottish and UK income tax rates and bands. Under the five-band structure the basic rate band has effectively been split into three – the starter, basic and intermediate rate bands. The additional rate band has been renamed the top rate band, and the higher and top rates are each set at one percentage point higher than their UK income tax equivalents, at 41% and 46% respectively.
In 2022/23, as in the preceding few tax years, there continues to be a difference between the Scottish higher rate threshold and that in the rest of the UK. The higher rate threshold for Scottish taxpayers, in respect of earned income (including rents), is £43,662 for 2022/23 (this represents a freeze at the 2021/22 level), assuming eligibility for the personal allowance. In the rest of the UK, the higher rate threshold is £50,270 for 2022/33, which is also the threshold that applies 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 2022 are set out below:
|Scottish income tax rates 2022/23||Scottish income tax bands 2022/23|
|Scottish starter rate - 19%||£12,571 - £14,732 (£2,162)|
|Scottish basic rate - 20%||£14,733 - £25,688 (£10,956)|
|Scottish intermediate rate - 21%||£25,689 - £43,662 (£17,974)|
|Scottish higher rate - 41%||£43,663 - £150,000|
|Scottish top rate - 46%||£150,001 and above|
While Scottish taxpayers with earned income of less than £27,850 in 2022/23 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 around £21 for the year. Scottish taxpayers with earned income of more than £27,850 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 £50,000 (assuming this is all earned income) will have a tax liability of £8,975.10 in 2022/23 (personal allowance of £12,570; £2,162 at 19%; £10,956 at 20%; £17,974 at 21%; £6,338 at 41%); meanwhile, a taxpayer subject to the UK rates and bands will have a tax liability of £7,486 (personal allowance of £12,570; £37,430 at 20%). A difference of £1,489.10.
A Scottish taxpayer with total income of £100,000 (assuming this is all earned income) will have a tax liability of £29,475.10 in 2022/23 (personal allowance of £12,570; £2,162 at 19%; £10,956 at 20%; £17,974 at 21%; £56,338 at 41%); meanwhile, a taxpayer subject to the UK rates and bands will have a tax liability of £27,432 (personal allowance of £12,570; £37,700 at 20%; £49,730 at 40%). A difference of £2,043.10.
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 first arose in 2017/18 when Scottish income tax and UK income tax bands first diverged from one another.
By way of example, a Scottish taxpayer with earned income of £49,000 and savings income of £2,000 in 2022/23 will have to work out their tax liability as follows.
Their total income is £51,000, but this is reduced to £38,430 by their personal allowance (51,000 – 12,570). This means they have to pay income tax on £36,430 of their earned income (49,000 – 12,570), according to the Scottish rates and bands – so at 19% on £2,162, at 20% on £10,956, at 21% on £17,974 and at 41% on £5,338.
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 £37,700 – the taxable earned income, subject to Scottish income tax, has used up £36,430 of this band, leaving £1,270.
Firstly, the taxpayer is entitled to the personal savings allowance; since their total taxable income is £51,000, 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 £770 is taxable at the UK basic rate of 20%, and £730 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 £51,000 exceeds the UK higher rate threshold of £50,270 by £730.
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 – £50,270 for 2022/23.
In anticipation of the introduction of the separate Health and Social Care Levy in April 2023, the UK Government has increased the Class 1 NIC employee rates to 13.25% (main rate) and 3.25% (above the Upper Earnings Limit) for 2022/23, and the Class 4 NIC rates to 10.25% (main rate) and 3.25% (above the Upper Profits Limit).
As a consequence, in 2022/23 Scottish taxpayers with earned income that is subject to NIC will find themselves paying a joint Scottish income tax and NIC marginal rate of 54.25% (if employed) or 51.25% (if self-employed) on earned income that falls between the Scottish higher rate threshold of £43,662 and the UK higher rate threshold of £50,270. Taxpayers who pay UK or Welsh income tax 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 those specified in the legislation. Broadly, this means a taxpaying civil partner or spouse of a non-taxpayer is eligible provided they do not pay tax at the higher or top (additional) rates of tax.
If the higher earner is a Scottish taxpayer in 2022/23, and has total taxable income between £43,662 and £50,270, 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 during the relevant tax year. If, as a result of such payments, they do not actually pay any higher rate tax, even though their total income is above £43,662, they would be eligible to be the recipient of the marriage allowance from their non-taxpaying civil partner or spouse.
Pension contributions tax relief and Gift Aid tax relief
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. Scottish taxpayers who pay tax at a rate higher than 20% are 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 receive tax relief automatically at their marginal rate of tax.
For relief at source pension arrangements, pension providers continue to claim tax relief at 20% for all Scottish taxpayers.
HMRC will not recover the difference between the Scottish starter and Scottish basic rate, where a Scottish taxpayer receives 20% relief but has only paid tax at the starter rate of 19%.
Scottish taxpayers who are liable to income tax at the Scottish intermediate rate of 21% are 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 need to contact HMRC.
Scottish taxpayers who are liable to income tax at the Scottish higher rate (41%) and Scottish top rate (46%) are 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.
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 continues for 2022/23 and should allow the PAYE system to deal with Scottish taxpayers who have typical ‘L-suffix’ tax codes, such as S1257L.
Note that there are additional codes to deal with second employments, for example SBR, SD0, SD1 and SD2, which apply Scottish income tax at the flat rates of 20%, 21%, 41% and 46% respectively.
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.
Scottish taxpayers who have PAYE income should have a Scottish PAYE tax code (a code with an “S” pre-fix).
The Low Incomes Tax Reform Group (LITRG) website provides Scottish income tax guidance in its tax basics section.
Scottish taxpayer status is a question of fact. A taxpayer’s home address is not the only factor in determining Scottish taxpayer status, but it will be decisive in many cases. There is guidance on who is a Scottish taxpayer on the LITRG website.