A small change in the basic rate income tax band for Scottish taxpayers will sow confusion in 2017/18, but there is more to come.
Donald Drysdale explained how the Scots are set to go their own way, for certain types of income tax from 6 April 2017. The rates of income tax charged will remain the same across the UK, but as the upper threshold of the basic rate band will differ, the combined effect of tax and NI will produce some higher marginal rates on earned income for certain Scottish taxpayers.
This point was glossed-over by the Scottish Parliament, but the effect is clear from this table:
|2017/18||Scottish taxpayers||Rest of UK taxpayers|
|Basic rate band*||31,500||33,500|
|40% tax rate applies from*||43,000||45,000|
|Class 1 NIC UEL||45,000||45,000|
|Class 4 NIC UPL||45,000||45,000|
* figure altered on 2 Feb 2017 as Scottish Parliament changed its Budget proposals
As national insurance is not a devolved tax, the NI thresholds are set by the UK Parliament. For Scottish taxpayers, this means the upper limits for class 1 and class 4 NIC will be above the 40% income tax threshold for 2017/18, and possibly beyond. This results in a 52% marginal tax and NI rate for Scottish taxpayers on employment income between £43,000 and £45,000.
Savings and dividends
To add to taxpayers’ confusion the basic rate band of £31,500 will not apply for savings income, dividend income or capital gains received by Scottish taxpayers. Instead the UK-wide threshold of £33,500 will apply for those taxes.
To calculate the level of the savings allowance, rate of dividend tax or CGT, a Scottish taxpayer (or their tax adviser) will have to perform a parallel tax calculation using the tax bands applicable in the rest of the UK.
How are you going to explain that to your clients? Will your tax software cope with parallel income tax computations, including a personal allowance which can be shared at will across all types of income?
A Scottish taxpayer is principally defined by their close connection with Scotland. All Scottish Parliamentarians (MP, MSP, MEP) are Scottish taxpayers, even if they spend most of their time outside Scotland.
Other individuals are Scottish taxpayers if their main place of residence is in Scotland. At present HMRC is interpreting the main residence as the taxpayer’s correspondence address.
All Scottish taxpayers should have been issued with an S prefix tax code, which tells their employer whether to apply the Scottish tax bands instead of the rest of the UK tax bands. However, in written evidence to the Scottish Parliament finance and constitution committee, HMRC said it missed 420,000 taxpayers from its first attempt at identifying Scottish taxpayers. It is not clear whether all Scottish taxpayers have now been issued with an S prefix code. Kate Upcraft reports: “I meet taxpayers all the time who should have, but still don't have, an S prefix tax code. It's the problem with using employee address data via the RTI feed.”
Welsh and Irish
This Scottish tax band confusion will pale into insignificance by April 2019, when the Welsh government is expected to take on power to create Welsh rates of income tax.
Also from 1 April 2018 the Northern Irish Assembly will be able to impose a special rate of corporation tax on companies trading in Northern Ireland. This CT rate is expected to be aligned with the main rate of corporation tax in the Republic of Ireland, which is currently 12.5%.
This article has been edited to reflect amended Scottish Budget for 2017/18 as at 2 February 2017
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.