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Scottish tax rates add to complexity

22nd Feb 2018
Tax Writer Taxwriter Ltd
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Scottish and English Money

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
Over 150,000 46 2 48
*effective rate due to tapering away of personal allowance


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.

Other income

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
Earned income Yes No
Self-employed profits Yes No
Dividends No Yes
Savings income No Yes
Savings allowances No Yes
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
Marriage allowance Unclear Unclear
Childcare vouchers No Yes
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!

Marriage allowance

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. 

Replies (9)

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By coalface
22nd Feb 2018 16:49

But but but... HMRC couldn't successfully program the tax calculations for 2016-17 so how can they hope to deal with this - unless they have learnt from experience!

Thanks (1)
Replying to coalface:
Hallerud at Easter
23rd Feb 2018 14:14

Presume the " Scottish" tick flag on the tax return and S coding prefix on your tax code does the necessary, moves you to a different set of calculation tables; now whether it works!!

Thanks (0)
By Moo
26th Feb 2018 10:26

Rebecca, can you please confirm my understanding that rental income received by Scottish taxpayers is subject to Scottish income tax - ie treated as non savings income? In which case do we yet know what rate will be used to calculate the basic rate tax reduction for disallowed mortgage interest?

Thanks (0)
Replying to Moo:
By Rebecca Cave
26th Feb 2018 13:38

Yes rental income received by a Scottish taxpayer will be subject to the Scottish tax rates. Good question about the basic rate tax reduction. I will research further for you.

Thanks (0)
Replying to Moo:
By Rebecca Cave
27th Feb 2018 10:24

I have looked at the law ( ITTOIA 2005, s 274AA) and asked a friend. We have concluded that the basic rate of tax used in the calculation of the tax crdit for the landlord will be 20% in 2018/19, even for Scottish landlords.
This means that individual Scottish landlords holding residential properties will be disadvantaged compared to similar landlords in the rest of the UK.

Thanks (1)
By Paul Soper
26th Feb 2018 11:11

The rounding up of the marriage allowance to £1,190 is a direct consequence of the indexing provisions applied to tax allowances, to £10 and tax rate bands to £100. (something that the Scots seem to have forgotten with their bodged rate bands - £43,430 is what the basic rate threshold would have been for the previous year, 2017/18 before the Greens insisted on it being frozen in absolute terms, the original Scottish proposal was a threshold of £44,273!)

Thanks (0)
By Paul Soper
26th Feb 2018 14:34

A further issue is defining who is a Scottish taxpayer for this purpose - HMRC are concentrating on postal addresses and asking employers to get them updated but according to the legislation it is the place of a taxpayers main residence in fact - and as a further twist, if that changes during the year there is no split year treatment - so a taxpayer moving main residence from scotland to England in June will NOT be a Scottish taxpayer - although probably his coding as an employee will indicate that he is, and moving to England in November will be a Scottish taxpayer until the following April 5th - lot's of fun for the tribunal service in the future. I haven't looked at this in detail yet but I got the impression that the definition of a Welsh taxpayer, which becomes significant from April 2019 onwards, is not the same as the definition of a Scottish taxpayer - can this be so?

Thanks (0)
Replying to Paulsoper:
By Moo
27th Feb 2018 16:00

I deal with contractors working in oil and gas and have clients with their home in Scotland but working in RUK and living in rented accommodation Monday to Friday or conversely home in RUK and renting and working in Scotland so I've been following the residence debate. In these sorts of circumstances it seems to have firmed up on where are your family, doctor, golf club etc located rather like the tie breaker tests used in normal dual residence.
I agree that people who move their main residence part way through the year may give scope for argument, will that come down to day counting? and if so does it make the planning of overseas holidays crucial for people moving mid tax year so they reduce the days physically spent in the higher tax jurisdiction to tip the balance.

Thanks (0)
Replying to Moo:
By Paul Soper
27th Feb 2018 16:27

This is the official guidance in it's most recent form and indeed day counting is part of the process - - as it goes on to point out there is no legal definition of residence (well there is for the statutory residence test but this predates it and is independent of it in all circumstances save one - you must be UK resident in the first place to be a Scottish taxpayer) - I am sure that people like your contractors will give difficulty!

Thanks (0)