Scottish tax rates add to complexity
The Scottish Parliament has passed its Budget Bill for 2018/19, which introduces five tax bands and rates for Scottish taxpayers. These new rates will have knock-on effects for certain income tax reliefs and allowances.
Donald Drysdale set out the Scottish tax proposals for 2018/19 in December 2017. But since then, political manoeuvrings at Holyrood have resulted in the threshold for the 41% rate being reduced, which will increase tax for higher earners.
Ten tax bands
To help you visualise the interaction of the new Scottish rates and NIC payable by employed earners under state retirement age, I have constructed the following table:
|Income in band £||Scottish tax rates %||Class 1 NIC rates %||Total rate on band
|0 – 8,424||0||0||0|
|8,425 - 11,850||0||12||12|
|11,851 – 13,850||19||12||31|
|13,851 - 24,000||20||12||32|
|24,000 - 43,430||21||12||33|
|43,430 - 46,350||41||12||53|
|46,351 – 100,000||41||2||43|
|100,001 – 123,700||61.5*||2||63.5|
|123,701 to 150,000||41||2||43|
These Scottish rates will also apply to pension income received by Scottish taxpayers, but class 1 NIC is not due on pensions. Those Scottish taxpayers who are self-employed will pay the lower rates of class 2 and class 4 NIC instead of class 1 NIC shown above.
The Scottish tax rates only apply to income which is not dividends or savings income, but the new tax bands will affect tax relief and tax charges in many other situations.
Here is a list of what the Scottish rates will and will not apply to for a Scottish taxpayer:
|Income, relief or charge||Scottish rates and bands||UK rates and bands|
|Pension contributions relief at source||Given at 20% for all taxpayers, extra relief must be claimed at 21% and 41%||No|
|State pension deferred and paid as lump sum||Yes||No|
|Pension annual allowance charge||Yes||No|
|HICBC (clawback child benefit)||Applies from £50,000||No|
|Gift aid donations||Yes, but only 20% tax reclaimed by charity||No|
Rest of UK rates
To work out what tax rate a Scottish taxpayer will pay on dividends, savings or capital gains, you have to treat that person as if they were not a Scottish taxpayer (this is really what the law says), and reperform the tax calculation using the tax bands which apply for the rest of the UK. Good luck with that HMRC!
The marriage allowance is causing some headaches within HMRC, as it can only be claimed by couples where the higher earner pays no more than the basic rate of tax (rest of UK rate). However, for Scottish taxpayers the basic rate band will be divided into the starter rate (19%), basic rate (20%) and the intermediate rate (21%) in 2018/19.
It is likely that a claim for the marriage allowance will remain valid for all Scottish taxpayers who pay tax at less than the Scottish higher rate (41%), but that has yet to be decided.
For all eligible taxpayers, the amount of the marriage allowance has been increased to £1190 for 2018/19, up from £1185 as announced in the Autumn Budget. I discovered this by accident by reading the FT, the change has not been announced as such by HMRC, but it is there in version 7 of OOTLAR. I can only guess that the rounding up by £5 is to make the calculation of the relief easier for taxpayers who pay tax at 19% or 21%.
There may be other complications arising from the Scottish tax rates and bands which are yet to emerge. Please comment below if you can think of any more.