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Scottish income tax rates and thresholds confirmed – 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 2018.
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|
These rates and bands apply only to the non-savings and non-dividend income of Scottish taxpayers. There is more information about who is a Scottish taxpayer in the ‘tax basics’ section of this website, but in essence, if your home is in Scotland for more than half of a tax year, you are a Scottish taxpayer. As a result, these rates and bands will affect people who live in Scotland, if they have profits from rental property or if they have earned income, such as employment income, pension income and profits from self-employment.
Scottish taxpayers will continue to pay income tax according to the UK rates and bands of income tax on their savings and dividend income.
While the first year of Scottish income tax (2017/18) brought only a minor change, with a difference in the higher rate threshold, 2018/19 sees much more significant changes to the structure of income tax in Scotland.
In the first place, Scottish taxpayers now have a five-band structure, with the basic rate band having effectively been split into three – the starter, basic and intermediate rate bands. Secondly, the additional rate band is renamed the top rate band. Thirdly, 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 point at which individuals start to pay higher rate tax. If we assume that you are eligible for the personal allowance (£11,850 in 2018/19) and have only employment income, if you are a Scottish taxpayer, your higher rate threshold will be £43,430 for 2018/19; whereas if you are a UK taxpayer, your higher rate threshold will be £46,350.
These points of divergence between the Scottish and UK rates and bands inevitably create some complexities for Scottish taxpayers. For example, Scottish taxpayers who have savings and dividend income as well as earned income, will have to consider both the Scottish and the UK rates and bands when working out their tax liability. We explore these complexities in a blog on the Chartered Institute of Taxation website.
Due to the starter rate band, Scottish taxpayers with non-savings and non-dividend 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. The tax reduction is relatively small, at a maximum of £20 for the year. Scottish taxpayers who are also claiming Universal Credit or means-tested benefits are likely to see a significantly smaller reduction, perhaps of only £7 for the year, because a £20 increase in their net taxable income will reduce their Universal Credit entitlement by 63%.
We can take the example of Nina to illustrate.
Nina has employment income of £20,000 for 2018/19.
|Total taxable income||8,150|
|Starter rate band (19%)||2,000||380|
|Basic rate band (20%)||6,150||1,230|
|Total Scottish income tax due||1,610|
If Nina was a UK taxpayer, rather than a Scottish taxpayer, she would pay tax on her total taxable income of £8,150 at the rate of 20%, giving a total liability of £1,630. As a Scottish taxpayer, she only has to pay £1,610, which is £20 less.
It should also be noted that, as soon as a Scottish taxpayer has non-savings non-dividend income of more than £24,000, in order to calculate their own tax liability accurately, they will have to make use of three different bands and rates, excluding the personal allowance – a UK taxpayer earning the same amount will only have to apply one rate.
We can take the example of Craig to illustrate.
Craig has employment income of £24,500 for 2018/19. He wants to check that the correct amount of tax has been taken from his pay during the year, so he decides to calculate his own tax liability.
|Total taxable income||12,650|
|Starter rate band (19%)||2,000||380|
|Basic rate band (20%)||10,150||2,030|
|Intermediate rate band (21%)||500||105|
|Total Scottish income tax due||2,515|
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.
If you are a Scottish taxpayer and have PAYE income during 2017/18 and/or 2018/19, you should have a Scottish PAYE tax code (an “S” code).
We are currently updating our guidance in respect of the new rates and thresholds of Scottish income, and this will appear in our ‘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, but it will be decisive in many cases.