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Middle earning Scots to pay 52% tax

13th Apr 2016
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The Scottish government proposals for 2017/18 fail to factor in NIC, according to Richard Service.

What’s proposed

The Scottish government has stated that Scottish taxpayers won’t benefit from an above inflation increase in the basic rate band for 2017/18 and subsequent years. As Nicola Sturgeon put it, she has “ruled out passing on George Osborne’s tax break for the middle classes”. For Scottish taxpayers in 2017/18 the 40% tax band will start at £43,387 of taxable income; it will be £45,000 (£11,500 personal allowance plus £33,500 basic rate band) in the rest of the UK.  

The SNP policies are likely to be implemented if the SNP regains power following the Scottish Parliamentary elections in May, and those predicting the outcome believe there will be a SNP majority. The SNP states this tax announcement will be in its election manifesto; we have to treat it as a serious proposition, not mere politicking. 

Per the Scottish government announcement, the maximum extra tax a Scottish taxpayer will pay for the tax year 2017/18 will be £323. But this extra tax is double the amount which Scottish employees should have to pay to deny them the benefit of the above inflation increase in the UK basic rate band. The marginal rate of tax on this band of income will be 52%.

Taxes on income from employment

Earned income, such as employment income, will be caught by the extra tax. The Scottish government proposals for 2017/18 considered the effect of income tax but not national insurance contributions (NIC) on the restricted basic rate band. 

NIC rates and bands 

The rates of national insurance and the bands of income to which those rates are applied are reserved to the UK parliament to set. There are two positive rates of employee NIC class 1 primary contributions:

  • above the NIC primary threshold - 12%
  • above the upper earnings limit (UEL) - 2%

For 2016/17 employees pay 12% on earnings between £155 and £827 a week, and at 2% on weekly earnings above £827 – the 2016/17 UEL.

The fall in NIC from 12% to 2% coincides with point at which income tax rises from 20% to 40%. The UEL is aligned to the top end of the basic income tax rate. NIC may be a hidden tax, but it’s as much a tax as income tax for those who have to pay it. Very few state benefits are linked to payment of NIC. The state second pension was one. However due to the introduction of the new flat rate pension from 6 April 2016 the level of NIC does not impact the level of state pension.

Marginal rates

Factoring in NIC, the actual marginal rate of tax on most employment income is 32% within the basic rate band, 42% in the higher rate band and 47% at the additional rate. These are made up of 20% tax plus 12% NIC, then 40% tax plus 2% NIC and 45% tax plus 2% NIC (NIC is paid on some income below the tax threshold, but for 2017/18 there’ll be no difference north and south of the Scottish border).

While we have to wait till November or December 2016 for the announcement of the NIC rates and limits for 2017/18, unless there is a departure from long established practice, the UEL will be aligned to the starting point for higher rate income tax for taxpayers outside of Scotland.

Rest of the UK

Taxpayers in the rest of the UK will only receive a 10% benefit. The “benefit” to employees in the rest of the UK from the above inflation increase of the basic rate band will not be £323. While their income tax rate on this slice falls from 40% to 20% so their income tax bill will be up to £323 lower, the rate of NIC on this slice of income will increase from 2% to 12%. Their marginal rate on this slice of income will fall from 42% to 32%. The maximum overall tax and NIC saving for employees in the rest of the UK from the above-inflation increase in the BR band will be £161.

Marginal rate for Scottish workers

On the extra £1,613 of earnings that in Scotland will be subject to tax at the higher rate, Scottish based employees will indeed pay 40% income tax. But as these earnings will suffer the 12% rate of NIC – not the 2% rate – as NIC bands are set by reference to the basic rate limit in the rest of the UK. Tax plus NIC on this slice of Scottish taxpayers’ earnings will be 52p of every pound of earnings – a marginal rate of 52%.

The self employed

Scottish based self employed will also suffer a greater cost. There are currently two rates of class 4 NIC payable by the self-employed:

  • 9% up to the starting point for higher rate income tax
  • 2% on profits in the 40% and 45% tax bands

Scottish based self-employed will have a marginal tax rate of 49% on this slice of profits: 7% above the rate required to claw back the benefit.

What should be done? 

If the intention is that Scottish taxpayers should not see any benefit from the above inflation increase in the basic rate limit, the Scottish government should be proposing a new 30% tax rate for employees on this slice of earnings and a 33% tax rate for the self employed on the £1,613 slice of profits.

The current proposals do not merely reverse the benefit of the increase in the basic rate band; they impose a tax increase on Scottish taxpayers.

If the Scottish government changes its proposal and introduces a 30% (and possibly for the self employed 33%) rate of tax we’ll have the administrative problems of a special rate – or rates – applying to a narrow band of income tax for Scottish taxpayers. 

Scottish taxpayers will be hit by an unexpected 52% marginal tax rate unless the Scottish government changes its proposals. If they decide to not impose a tax increase and introduce a narrow 30% tax band the tax system becomes that bit more complex.

Richard Service is a volunteer adviser with Tax Help for Older People. Pease consider supporting the Bridge the Gap appeal which raises funds for the tax advice charities: Tax Aid and Tax Help for Older People.

Replies (10)

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paddle steamer
14th Apr 2016 15:27

Estate agent wanted

Estate agent in Berwick/Cornhill on Tweed wanted for property acquisition.

Ideally can also deal with marketing and sale of character Edinburgh property.(shortage of toilets and draughty windows)

Required property within reach of rail link to Edinburgh, 3 bedroom minimum required plus home office space. (fishing rights a bonus)

All applications please respond to XXXXXXXXXX. A successful outcome may lead to numerous referrals to business contacts within the Edinburgh market.


Thanks (1)
By cparker87
14th Apr 2016 23:38

yes DJKL
Give it up and come south of the wall.

I have a couple of Scots clients and am not looking forward to explaining how Nicola has buggered them for the sake of political point scoring.

She may well end up treated as the fish that is her namesake by just my angry lot let alone the rest of the Scots.

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Replying to michaelbeaver:
By Isla
29th Apr 2016 01:07





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Replying to michaelbeaver:
By Isla
29th Apr 2016 01:06

The Scotch

Really, Scotch is a drink, the people are Scots. 

They are not spending other people's money, as it so happens per head of population the Scots contribute more to the UK economy than any other nation in the UK.  They also manage their own NHS budget and the budgets of their universities, none of that comes out of your pocket or mine. 

They are also too busy working to make a success of their country, to waste time explaining these points to people from other nations within the UK.  Therefore on their behalf I have done this for them.

Your comments are just a prime example of why the Scottish people want to manage their own country.


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By andyscotland
18th Apr 2016 13:15

"Middle Income"?

Your analysis looks about right, and there's no doubt that tax and NI (including Employer's NI) should be consolidated - both because it would save enormous hassle all round and because it would make it much more obvious what the real marginal rates of tax are at each level. That's not just about the 12% / 2% threshold, but also that a good chunk of the "tax-free allowance" is nonetheless above the NI threshold and so actually taxed at 12%.

However, the heading of your article is hugely inaccurate. A salary of £43,400 is not in any way "Middle earning".

Per the ONS data for 2015 ( 80% of people in the UK earned less than £37,810 a year and only 10% earned more than £49,000.

The figures for Scotland are much more stark - only 10% of the population earned more than £45,969 last year. The difference is primarily due to salaries in London, which significantly skew UK-wide averages. The 90th percentile in most parts of the UK except the southeast is around £42,000 - £43,000.

Statistically, "Middle income" in the UK means somewhere around £26,000 a year.

While of course it's reasonable to ask at what point different tax rates should kick in, there's no escaping the fact that anyone who earns £40k is very much at the top end of the income distribution.

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By Mallock
18th Apr 2016 13:48

Short Sighted

I have a few friends who spend 3 or 4 days a week working in London and in other parts of England but reside in Scotland. They are at the very top end of the earning scale on multiples of 6 figures.

Stamp duty changes have already reduced the values of the top end houses in Scotland (low oil prices have also caused major problems in Aberdeen) and the prospect of the reintroduction of a 50% top rate of tax, a significant increase in Council Tax for properties worth more than c£250K and other unfriendly policies has already resulted in one of my friends deciding to move south - he currently pays tax and NI well into 6 figures, so that's good news for the Chancellor and bad news for Scotland. Those crunching the figures for the SNP, tucked up comfortably in their vacuum obviously never took physics because every action has an equal and opposite reaction. Although in this case the reaction might be considerably greater than has been forecast. Any Government that thinks it can persecute a minority within a United Kingdom is going to come unstuck fairly quickly when it finds all the money running south.

I've already checked out Harrogate.

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By Jim Ross
18th Apr 2016 14:30

NIC's are the same regardless

This is fairly typical of the sort of spin that we saw during the referendum campaign. People in Scotland will pay NIC's at the same rates with the same thresholds as everyone else in the UK.

Therefore the additional cost to Scottish taxpayers for this change is 20% on a fairly narrow band of earnings £1,613, meaning all higher and additional rate Scots will pay £322.60 each. Not too much to get excited about.

As a Scot living in Scotland I'd be much more worried if one of the other parties were to win the election. Perhaps, some analysis of what they're all proposing would make a better article.

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By Mallock
18th Apr 2016 15:56

I Agree

I agree that NIC contributions will be the same regardless but the tax changes are just the thin edge of the wedge.

Who to vote for in the Scottish Elections is a real problem. Many I know who voted Yes in the referendum are not going to vote for SNP due to the move to a higher tax system. However there is a problem because who do you vote for?

Labour and the LibDems want a 1% increase in the basic rate and the 40% rates of tax, as well as the increase in the top rate of tax to 50%. Overall this would be much more costly for anyone earning more than about £45,000 but it would at least spread the burden a bit more and would certainly increase the total amount collected although it is also likely to lead to an increase in the black economy as those with cash jobs, flex their figures!

Although the Tories appear to be a swear word in Scotland, I can see their position strengthening a bit and a lot more independents getting a chance.

Increasing tax is always popular when it doesn't affect you and with only 10% of taxpayers impacted, it isn't going to impact on 90% so it is a smart political move. However when that 10% provides in excess of 50% of the tax paid, you don't need to upset and lose many of them to find yourself in a net loss position. 

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By cfield
18th Apr 2016 17:10

An interesting experiment

Interesting to see how this will affect politics in Scotland over the next few years. If the Left hadn't succeeded in demonising the Conservative Party so much, the choice would be obvious, but for most Scots they simply aren't an option, no matter how much tax they're charged.

The main thing they have against the Tories of course is that they're an "English" party. If the Scottish Tories were truly independent, they might get more people to vote for them. Maybe they should form a new Unionist party. The Unionists were independent until 1964 when they merged with the Conservatives. We already know there is a pro-UK majority in Scotland, so if the new Unionists aim for the centre ground of Scottish politics and pledge to stand up for Scotland, the SNP might start to have some real opposition.

It will also be interesting to see how Scottish taxpayers react. If enough of them up sticks and come South, the Scottish Government will lose more tax revenues than it gains. Of course, that won't matter much whilst they're still being subsidised by the rest of the UK, but it will send out a strong message.

We might even see house prices and rents just south of the border going up quite a bit as Scots flock to be taxed at English rates. A bit like people try to get an address near a good school. The locals will love it - seeing themselves being priced out of their own towns by a load of wealthy Scots pretending they live in England.

Edinburgh might even have to introduce a Statutory Residence Test of their own. Let's hope it's not as complicated as our one.


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Replying to moneymanager:
paddle steamer
19th Apr 2016 14:49

Scots not Scotch

cfield wrote:

We might even see house prices and rents just south of the border going up quite a bit as Scots flock to be taxed at English rates. A bit like people try to get an address near a good school. The locals will love it - seeing themselves being priced out of their own towns by a load of wealthy Scots pretending they live in England.

Edinburgh might even have to introduce a Statutory Residence Test of their own. Let's hope it's not as complicated as our one.


There has already been a bit of targeted marketing in "The Scotsman" of properties for sale just over the border. I still fancy the redundant train station at Norham but my other half  will not let me acquire a full size trainset. :)

Once our tax system becomes more removed from rUK are all of us on here going to have to leave you on Accounting Web to populate our own Scottish version?


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