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Income Tax Rising

Income Tax Rising

Three weeks after the UK budget, the Scottish Finance Secretary, Derek Mackay presented the Draft Scottish Budget on 14 December 2017. Not surprisingly, income tax and land and buildings transaction tax were the two main items affecting individuals.

Income Tax

As expected, changes were announced to Scotland’s income tax regime with effect from 6 April 2018. The level of the personal allowance is still a reserved matter and therefore follows that set by the UK government which will be £11,850 for 2018/19. In Scotland, additional ‘starter’ and ‘intermediate’ bands join the basic, higher and additional rate bands, with the relevant rates of tax being as follows:

Starter rate £11,850 - £13,850 19%
Basic rate £13,851 - £24,000 20%
Intermediate rate £24,001 - £44,273 21%
Higher rate £44,274 - £150,000 41%
Additional rate £150,001 upwards 46%


These rates will only apply to the earnings (employment, self employment, pension and property income) of Scottish taxpayers. Savings income and dividends will continue to be subject to UK income tax rates. Scottish taxpayers are individuals who are UK resident for tax purposes and essentially have their main residence in Scotland. Their place of work is irrelevant.

The changes were laid before the Scottish parliament with the statement that no one with an income of less than £33,000 would pay more tax next year than this year. This is indeed true, however, it is due to the rise in the personal allowance, set by the UK government.

The Scottish government froze the band at which higher rate tax is paid this year meaning that Scottish taxpayers pay 40% income tax at £43,000 rather than at £45,000 as set by the UK government. For non Scottish UK tax payers National Insurance contributions drop from 12% to 2% at higher rate tax levels but not so for Scottish tax payers meaning that they pay an effective rate of 52% in tax on earnings between the Scottish higher rate band and the UK one. This will now increase to 53%.

This theme continues for next tax year. Rather than compare a Scottish taxpayer’s tax bill next year with their bill this year as Derek Mackay did the impact of the Scottish rate of income tax can be seen more clearly by comparing a Scottish taxpayer’s bill with a taxpayer from south of the border.

Take for example the Scottish taxpayer earning £33,000. While their tax bill next year will be no greater than this year, in real terms they will be worse off due to inflation, and £70 worse off than their non Scottish UK taxpayer counterpart.

The difference increases markedly the higher the Scottish taxpayer’s earnings. At £40,000, it is £140. At £50,000 the impact of the higher rate band set at a lower amount means it is £655 and at £60,000 it is £755, which is 6% more income tax than a taxpayer would pay in the rest of the UK.

More rates of income tax means further complications. Gift aid payments are claimed on the basis that tax has been paid at the basic rate of 20% with higher and additional rate taxpayers being able to claim the surplus in their self-assessment tax return. Pension contributions too are generally grossed back up by the basic rate. It is understood that secondary legislation will be introduced to deal with these factors.

Land and Buildings Transaction Tax

Following the UK budget last month, the Scottish government also proposed the introduction of a further exemption for first time buyers from the Scottish equivalent of Stamp Duty Land Tax, Land and Buildings Transaction Tax. While not going as far as the SDLT exemption which applies up to £300,000, first time buyers of Scottish property will not pay any LBTT where the purchase price is £175,000 or below, a saving of up to £600.

First time buyers purchasing a property with a purchase price of over £175,000 will also benefit from this saving, paying LBTT at the usual rates on the balance above £175,000.

Whereas the SDLT change was effective from UK Budget Day, the Scottish government will launch a consultation on the policy before introducing the first time buyer relief in 2018/19.

Nothing was done to tackle the major issue of the differential between LBTT and SDLT rates for houses between £325,000 and £750,000 and the log jam it is causing in the housing ladder.

Devolved taxes

So, where does all this lead to? Having had income tax raising powers since devolution began, the Scottish Government has finally used them. It remains to be seen whether the minority SNP Government will manage to have the Draft Budget passed through Parliament unscathed. It will also be interesting to see if the changes in the last two years now form a pattern for the years to come. The income tax differences between Scotland and the rest of the UK may not be substantial but it will be interesting to see the impact it has, particularly with people who could potentially settle on either side of the border. With LBTT on Scottish houses over £325,000 paying some tax at 10% as opposed to 5% in England, it could make the prospect of buying a house south of the border even more attractive.

Ronnie Brown
Partner and Head of Tax

Claire E Macpherson