Radical changes to Scottish Tax Rates – Are you better or worse off?

More or less tax? In his budget of 14th December, Scotland’s Finance Secretary made a big deal about cutting the tax bill for 55% of Scottish taxpayers by creating two new income tax rates. However, overall it’s estimated that the changes will rake in an extra £164 million in 2018/19, which will come from the pockets of those employees earning £33,000 or more per year.

However, as dividends continue to be taxed at the UK government rates, company directors paying themselves dividends will not pay the additional income tax in 2018/19.

New rates. The extra rates make for a confusing picture. Derek Mackay announced that two new tax bands, starter and intermediate, would be created, splitting the old standard basic rate band into three. The intermediate, higher and additional tax band rates are also to be increased by 1%. The new Scottish bands and rates for 2018/19 will be:

Personal tax-free allowance

£11,850

Start rate 19%

£11,851 to £13,850

Basic rate 20%

£13,851 to £24,000

Intermediate rate 21%

£24,001 to £44,274

Higher rate 41%

£44,275 to £150,000

Additional rate 46%

£150,001 and above

Dividend tax rates. An important point for company directors who receive the majority of their income as dividends is that the dividend tax rates are set by the UK Government, and not the Scottish government. These rates for 2017/18 are:

0 % rate

First £2,000 of dividend income

Ordinary dividend rate – 7.5%

Dividend income in the UK basic rate tax band £11,850 - £46,350

Higher dividend rate – 32.5%

Dividend income in the UK higher rate tax band £46,351 - £150,000

Additional dividend rate – 38.1%

Dividend income in the additional UK rate tax band > £150,000


So, it is possible for small number of high earners in Scotland with a mix of employment and dividend income to be taxed at the following NINE rates of income tax:

0%, 7.5%, 19%, 20%, 21%, 32.5%, 38.1%, 41%, 46%

Scottish employees. The new tax rates make it all the more important that employers, wherever they are located in the UK, apply the special tax codes for Scottish workers. As you are probably aware, Scottish tax codes can be identified easily because they are prefixed with “S”.

Abandoning Scotland. Employees can attain or lose their Scottish taxpayer status at any time where they permanently move to another part of the UK. Where this happens part way through a tax year the change of tax residency applies for the whole year. The converse applies. Where HMRC becomes aware of a change in status it will issue or withdraw an “S” code. Any refund resulting from a change of code will be made through the PAYE system.

Tip. As an employer, your payroll software will work out the tax for “S”codes, but it’s important you keep it up to date with changes to employees’ addresses so HMRC can assess if an “S”code is required.

When do they come into effect? The new rates will come into effect for the 2018/19 tax year; i.e. from 6 April 2018. However, the The Scottish Parliament will consider the Budget (Scotland) Bill in three stages, starting in January and concluding at the end of February. As a minority administration, the SNP-led Scottish Government must secure the backing of at least one other opposition party to ensure that its proposals are passed into law.