Save content
Have you found this content useful? Use the button above to save it to your profile.
Scottish football fans
istock_michael_luhrenberg_sf

The stramash of Scottish tax bands

by
12th Jun 2017
Save content
Have you found this content useful? Use the button above to save it to your profile.

Calculating the tax position of Scottish taxpayers is not easy or logical, particularly when the individual has several different types of income and capital gains.   

A muddle

In the Scottish dialect a ‘stramash’ is a moment of disorder, an uproar, tumult or brawl, so it seems fitting to apply that term to the confusing mess of income tax bands and rates that apply to Scottish taxpayers from 6 April 2017. 

The Scottish Parliament has used its powers to set the rates and thresholds for the Scottish rate of income tax (SRIT), which replaces ten percentage points in each income tax band. The rate of SRIT has been set at 10% for each tax band, which means the total tax rate applicable in each tax band remains the same as in the rest of the UK.

However, the income tax bands for Scottish taxpayers are now out of line, with those that operate for taxpayers in the rest of the UK, as illustrated in table 1. This has led to increased complexity as I explained in January.

Table 1

2017/18

Taxpayers paying SRIT

Other UK taxpayers

Personal allowance

£11,500

£11,500

20% tax on:

31,500

33,500

40% tax from:

43,000

45,000

45% tax from:

150,000

150,000

Types of income

The root of the problem is the fact that the SRIT only applies to certain types of income, so the operation of the Scottish tax bands is restricted to those categories of income, plus any associated allowances or reliefs, see table 2.    

Table 2

SRIT and Scottish tax bands apply to:

Other UK tax bands apply to:

  • Income from employment
  • Dividend income
  • Profits from self-employment
  • Savings income
  • Rental income
  • Savings allowances
  • Pensions and state pension
  • Childcare vouchers
  • Marriage allowance
  • Capital gains
  • Tax relief on gift aid donations

 

  • Tax relief on pension contributions

 

Parallel tax computations

A Scottish taxpayer who has a significant amount of dividend or savings income as well as some earned income, will have to undertake two parallel tax computations, as shown in example 1.

Example 1

Sheila has a salary of £43,500 plus £2,000 of interest, so she needs to do two tax calculations as follows:

2017/18

Scottish tax bands

Tax payable

Salary

43,500

 

Personal allowance

11,500

 

 

32000

 

Taxed at 20%

31,500

6300

Taxed at 40%

500

200

Total tax on salary:

 

£6,500

When considering the interest of £2000, Sheila must revert to using the tax bands applicable in the rest of the UK, so the basic rate band of £33,500 rather than £31,500.

She has already used £32,000 of her basic rate band, leaving £1500 available.

She must then consider whether she has a savings allowance of £1000 for a basic rate taxpayer or £500 for a higher rate taxpayer. As her interest is £2000 and she has only £1500 of basic rate band available, she is a higher rate taxpayer and her savings allowance is £500. This savings allowance uses up £500 of the basic rate band.

2017/18

Other UK tax bands

Tax payable

Basic rate band

33,500

 

Used by salary as above

(32,000)

 

Balance of basic rate band

1,500

 

Interest covered by savings allowance @0%

(500)

0

Interest taxed in basic rate band @20%

1000

200

Interest taxed in higher rate band @40%

500

200

Total tax on interest

 

£400

Sheila’s total tax liability for 2017/18 is £6,900 (£6,500 + £400).

A similar parallel tax computation will have to be prepared for Scottish taxpayers with significant levels of dividend income, or capital gains.

Home address problem

To be a ‘Scottish taxpayer’ the individual must first be resident in the UK for tax purposes using the statutory residence tax (SRT), and also have their main home in Scotland. However, HMRC doesn’t want to work through the SRT to determine who lives in Scotland, so they have used the taxpayer’s correspondence address as a proxy for where that person lives.

Where a taxpayer is not resident in the UK based on the SRT, but have given correspondence in Scotland, HMRC will treat that taxpayer as a Scottish taxpayer. This is not the correct approach. That non-resident taxpayer should be taxed using the rest of the UK tax bands, to the extent that they have UK-taxable income, such as rental income. 

It will be interesting to see if the tax return software for 2017/18 copes with the parallel tax computations required for Scottish taxpayers, particular in view of the problems with tax return software for 2016/17, which have forced some taxpayers to file a paper tax return.

This article has been edited to correct figures in table 1.

Tags:

Replies (4)

Please login or register to join the discussion.

avatar
By gogarloch
14th Jun 2017 10:31

IRIS does the calculation differently.

As a Scottish taxpayer, allocate 31,500 BR to salary giving 31,500@ 20% plus 500 @40% giving £6500 of tax due.

UK BR band suprlus of 2000 is then allocate to savings as 500 @0% (SR) and £1500 @ 20% BR giving £300 of tax due.

Total liability under SRIT is £6800.

Thanks (0)
avatar
By Graeme Lindsay Abdn
14th Jun 2017 13:58

The basic rate band in Scotland is £31,500, therefore, higher rates are applicable when the total income exceeds £43,000 (i.e. PA £11,500 plus £31,500). The inflation increase of £430 was 'lost', as SNP required the assistance of the Green party to pass the Budget.

Thanks (1)
Replying to Graeme Lindsay Abdn:
Head of woman
By Rebecca Cave
14th Jun 2017 14:14

Thanks for noticing the errors in table 1. I have corrected those figures. As you noted I used the correct numbers in the examples.

Thanks (0)
avatar
By Graeme Lindsay Abdn
14th Jun 2017 13:59

Sorry, I was referring to the figures in Table 1 - the examples appear to use the correct BR band.

Thanks (0)