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Taxing Income Falling Into Scottish & UK Tax Bands

How are different types of income taxed, when they fall into both the Scottish & UK Tax Bands

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Would an individual with the following income:

Earned - 57,456

Savings - 7,146

Dividend - 5,112

Resident in Scotland and with gross pension contributions of 17,980. Pay tax on there savings income at basic or higher rate?

I thought most of the savings income would fall into basic rate, due to the basic rate bands increasing to 28,130 (Scottish) and 52,480 (UK), calculated as follows:

2,000   @ 19% - Scottish Tax

28,130 @ 20% - Scottish Tax

15,476 @ 21% - Scottish Tax

500    @ 0% - UK Tax

6,374 @ 20% - UK Tax

272    @ 40% - UK Tax

2,000 @ 0% - UK Tax

3,112 @ 32.5% - UK Tax

However, HMRC’s calculation appears to suggest that all the savings income would be taxed at higher rate.

Hoping someone might be able to explain why HMRC’s calculation taxes all the savings income at higher rate or perhaps that the HMRC calculation is wrong.


Replies (3)

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By lionofludesch
16th Sep 2019 16:23

It's because all the savings income (and dividend income) lies above the threshold for higher rate - at UK rates. Earned income is £57,456 which, in itself, is over the threshold.

I've time for no more a quick glance at options for allocating your personal allowance but I'm not seeing opportunities at the moment.

Have another look at where your Scottish rates fit.

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Replying to lionofludesch:
By Duggimon
16th Sep 2019 16:37

Gross pension contributions take it back under the threshold.

The HMRC calculation for Scottish taxpayers with both Scottish and UK income and with pension or gift aid contributions extending the basic rate band is wrong.

It's demonstrably wrong, you can find the calculation step that makes it wrong in the manual steps, it's box A167c. This box contains the amount by which the banding for the rest of the UK income is extended and it's defined as the amount of gross contributions less the amount taxed at the intermediate rate.

The banding for the rest of the UK income should not be affected by anything taxed at the Scottish rate, only the amount of band remaining, which is not the same thing - effectively there is income taxed at Scottish rates that both uses up the available band, and reduces the upper bounds of that band, taxing it twice (more or less, not exactly).

As far as I know, HMRC have no idea that this is wrong, though we've written to them about it. It was only three months ago though so there's been no reply.

Thanks (1)
By Kathryn15
13th Jan 2020 11:24

I have just completed a tax return for a client which results in a similar situation. I expected all the dividend income to be taxed at 7.5%, due to the basic rate band being extended by a pension contribution and therefore being more than total income for the year, but according to the tax return software it is all taxed at 32.5%. I don't believe this is correct and I was wondering if you have received any response from HMRC.

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