New Tax Rates in Scotland from 6 April 2018

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The Scottish Parliament set new rates of income tax which will be implemented from 6^th April 2018, the 2018/19 tax year. 

We will see a fundamental change to how an individual is taxed in Scotland.  HMRC will determine whether or not you are a Scottish Tax Payer, this is mainly based on where you are resident and your tax code will be the indicator with an ‘S’ at the beginning.

The new rates are outlined in the table below:

Individuals who will pay tax at these rates will have an ‘S’ at the beginning of their tax code. 

	Bands	Rates
Starter Rate	£11,850 - £13,850	19%
Basic Rate	£13,850 - £24,000	20%
Intermediate Rate	£24,000 - £43,430	21%
Higher Rate	£43,430 - £150,000	41%
Additional Rate	Over £150,000	46%

 

The Personal Allowance across the UK will be £11,850.  This allowance will be reduced by £1 for every £2 earned over £100,000

So, how will this impact on individuals

If you earned, say, £17,000 in tax year 2018/19, after deducting your personal allowance you would be subject to tax on £3,150.  The first £2,000 would suffer tax at 19% (£380), and the balance, £3,150 at 20% (£630).  The total tax payable would be £1,010.

If you were not resident in Scotland, but earned the same, you would pay £20 more in tax.

Let us look at an individual who earns £34,000.  The taxable income would be £22,150—again the first £2,000 would be taxed at 19% (£380), the next £10,150 would be taxed at 20% (£2,030), and the next £10,000 will suffer tax at £21% (£2,100), the total tax due of £4,510.

This leaves a Scottish resident £80 worse than those in the rest of the UK.

Let’s look at £45,000; the taxable income would be £33,150.  The first £2,000 would give rise to tax of £380 at the starter rate of 19%, the next £10,150 will be at the basic rate of 20% with the resulting tax of £2,030.  Next up we have £19,430 at 21%, £4,080.30 and lastly our new higher rate of tax at 41%, £643.70

The total tax for our higher rate Scottish tax payer for 2018/19 will be £7,134.  South of the border, the full £33,150 will suffer tax at only 20%, meaning that the Scottish tax payer will be paying over £500 more than their neighbours south of the border.

Lastly, If you earn say, £200,000 in 2018/19, you will have no personal allowance because your income exceeds the limit over £100,000, i.e. you add twice the personal allowance to get to the cut off limit, which is £123,700.  You are therefore taxable on the full £200,000.  We go through all of the relevant rate as we have before, £2,000 at 19% (£380), followed by £10,150 at 20% (£2,030), next we have the intermediate rate; £19,430 at 21%, higher rate of 41% on £118,420 resulting in tax of £48,552.20 and finally, the balance of £50,000 at 46%, the tax on this is £23,000.

The total tax due is £78,042.50, you will as a Scottish tax payer, pay £2,442.50 more.

To summarise, those that pay tax at the intermediate rate or above will generally pay more tax than their neighbours south of the border.

If you wish to minimise your tax and have your own business, you should look at the combination of salary and dividends.  You should also consider the impact that pension contributions may have.

From 6 April 2018, the dividend allowance will drop from £5,000 to £2,000, this will also drive more people who rely on investment income into self-assessment.  For the business owner, it is more important than ever to consider the combination of salary against dividend.

Pensions can also trip up individuals; at the moment you will receive basic rate tax relief on your pension contributions at source, i.e. the government will add 20% when you make the payment.  Higher rate and additional rate tax payers would then claim additional relief through their tax returns.  What happens though to the intermediate tax payer, they are left looking at reporting to HMRC to get their additional 1% relief?  How do they go about this, will they need to complete a formal tax return?  They will need to speak to their advisors to understand the next step.

These are fundamental changes to how we are taxed in Scotland, and when you add in the dividend rates of tax being, 7.5%, 32.5% and 38.1%, we have a considerable amount of tax rates for an individual to keep tabs on.