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The Scottish Budget – tax implications

Powers over Income Tax were devolved to the Scottish Parliament in November 2016 as part of the Scotland Act 2016 and yesterday’s Scottish Budget saw the first use of those powers.

The new Scottish Income Tax rates

Finance Secretary Derek Mackay has announced a radical reform of the Income Tax rates in Scotland with effect from April 2018.  He has created two new tax bands by splitting the existing basic rate band into three.  The new starter rate will be 19%, followed by the existing basic rate of 20%, then a new intermediate rate of 21% up to the higher rate threshold.  The higher rate and top rate of Income Tax will both increase by 1% giving rates of 41% and 46% respectively.

The higher rate threshold will continue to increase only in line with inflation; the threshold was not increased to £45,000 for 2017/18 like the rest of the UK but instead was set at £43,430.  Likewise for 2018/19 the Scottish threshold falls short of that set for the rest of the UK, meaning Scottish taxpayers will start paying higher rate tax earlier than the rest of the UK.

The new rates effective from April 2018, assuming you are entitled to the personal allowance, are:

Scottish bands Band name Scottish rates %
Over £11,850 to £13,850 Starter 19
Over £13,850 to £24,000 Basic 20
Over £24,000 to £44,273 Intermediate 21
Over £44,273 to £150,000 Higher 41
Over £150,000 Top 46


In comparison the rates for the rest of the UK are:

Rest of UK bands Band name Rest of UK rates %
Over £11,850 to £46,350 Basic 20
Over £46,350 to £150,000 Higher 40
Over £150,000 Top 45


Who pays Scottish Income Tax?

Given that many people live and work on different sides of the Scottish border or have homes throughout the UK there are a number of considerations to determine whether you are a Scottish taxpayer:

  • Put simply you will be deemed a Scottish taxpayer if you live in Scotland, this will be the case even if you work outside of Scotland. For example if you live in Gretna, but work in Carlisle you will be a Scottish taxpayer.

The implications

Despite these changes Derek Mackay has insisted that most Scottish taxpayers will pay less Income Tax next year, adding that the plans will make ‘Scotland’s Income Tax system even fairer and more progressive’.

As a result of the increased personal allowance next year and the tax cut to 19% at the lowest end of the tax bands, nobody earning up to £33,000 will pay any more tax than they do currently.  That said, the disparity between thresholds in Scotland with those in the rest of the UK does mean if you pay Scottish Income Tax you are likely to pay more in tax than if you lived in the rest of the UK.

This is going to be a logistical nightmare for those businesses running employee payrolls where they have English, Welsh and Scottish taxpayers to account for.

While the powers to set the tax rates lie with the Scottish Parliament, the powers for setting tax reliefs, allowances and National Insurance contributions remain with the UK government, meaning a joined up approach of setting rates and reliefs is problematic in the least.  The Income Tax system in the UK was already complex with different rates and allowances in place for savings and dividends, this announcement can only add more complexity to an already challenging system, which in turn increases uncertainty for those living and working in Scotland.

The Scottish Income Tax rates only apply to earned income such as wages, profits from self employment and pension income.  As a result if you live in Scotland you will continue to be subject to the same rates as the rest of the UK with regards to dividend income and savings income but using the above revised thresholds.  This results in Scottish taxpayers paying slightly more Income Tax on their dividends than the rest of the UK, due to the alterations to the higher rate threshold.

Where things can differ

For most people determining whether they are a Scottish taxpayer or not will be straight forward, as they either live in Scotland or they live elsewhere in the UK.  However if you have more than one home in the UK, for example one in Scotland and one in England you will need to determine which is your main home, this usually being where you spend most of your time.  This need not be a property that you own, it could be somewhere that you rent or live in for free.

If you work away, for example your home is in Scotland but you spend most of your time working outside of Scotland, or vice versa, the place where you spend most of your time may not be your main home.  In these circumstances your main home will be determined by the place where you have the most connections.  HM Revenue and Customs (HMRC) will consider factors such as:

  • where your family is located, if you are married
  • where all your possessions are located
  • where you have your banking facilities
  • where you are a member of clubs or societies

If you cannot determine where your main home is, whether you are a Scottish taxpayer will be determined by counting the number of days you spend in Scotland.  If the number of days in Scotland is more than the number of days you spend elsewhere then you will pay Scottish tax.  Examples of when day counting will be necessary are if you have nowhere that you stay for regular periods or where you have more than one place that you live and are closely connected to both places, that is simply not possible to identify which is your main home.

If you move to or from Scotland in the tax year you must notify HMRC straight away.  If you move to Scotland and you will be there for more than half the tax year, you will be a Scottish taxpayer and this will be backdated to the start of the tax year that you moved.

If you are an employee and a Scottish taxpayer your tax code will be amended to start with an ‘S’ and the Scottish tax rates will apply automatically through the PAYE system.

Land and Buildings Transaction Tax (LBTT)

Mr Mackay also announced an exemption from LBTT for first time buyers in Scotland for properties costing less than £175,000.  This is a move to mirror the new rules for first time buyers in the rest of the UK who are now exempt from Stamp Duty Land Tax on properties costing £300,000 or less, however this new Scottish threshold falls some way short of that applying to the rest of the UK.

As with all tax changes there will be winners and losers for those close to the thresholds.  If you are concerned about the impact on your household income or if you are unsure if the new Scottish Income Tax rates will apply to you, our tax experts are on hand to provide you with advice on your personal position.  Call 01228 711888 for more information.

Posted: December 15th, 2017

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