Scots to pay more income tax from 6th April – or will they?

Look away now if you are one of the one in seven Scots who are higher rate taxpayers with annual income of £43,000 or more.

From 6th April 2017 you will be paying more tax than your counterparts in the rest of the UK. Or will you?

The minority SNP Government required the support of the 6 Green MSP’s to pass the first reading of its 2017/18 budget on 2nd February. This created a historical situation where Scotland will keep its 40% tax threshold at £43,000 rather than the increase to the £45,000 limit that the rest of the UK will see.

Scottish taxpayers

Rest of UK Taxpayers

Personal allowance

£11,500

£11,500

Basic rate band

£31,500

£33,500

40% tax rate applies from

£43,000

£45,000

As usual with tax changes, there are winners and losers.

Bad news for employees

For someone in employment in Scotland earning more than £45,000, this will mean they pay an extra £400 per year in income tax. A Scottish taxpayer is defined as someone who lives in Scotland for half the year, and will have an “S” that prefixes their tax code, for example S1100L. All Westminster MP’s with Scottish constituencies are deemed to be Scottish taxpayers.

In its first attempt at the exercise, HMRC failed to identify 420,000 people as Scottish taxpayers.

Confusingly, the rates and bandings of National Insurance have not been devolved to Holyrood, so Scots will continue to pay the UK rate of NIC. Scots will pay 52% (40% income tax and 12% NIC) on their employment income between £43,000 and £45,000. This compares to a marginal rate of 32% (20% plus 12% NIC) payable by people south of the border and Northern Ireland.

Good news for Business Owners

Buried in the detail of the new legislation is a crumb of comfort if you run your own company and pay yourself dividends. The £43,000 Scottish 40% limit only applies to employment income. Income from savings, dividends and capital gains tax will be taxed using the £45,000 threshold for the rest of the UK.

So, if you are a business owner earning more than £45,000 you should be able to avoid (yes, avoid) the additional £400 income tax through some careful tax planning with your accountant.

Bad news for Accountants

The constant changing of tax rules, allowances and thresholds keeps us lucky accountants on their toes. The complexity of 2017/18 changes means that we will have to perform a tax calculation using the Scottish tax bands, together with a parallel calculation using the RoUK bands. We then compare one with the other to piece together what our clients 2017/18 tax liability will be.

Bad news if you write Accounting software

The Finance Bill needs to pass through two further stages before it becomes law. Software companies like IRIS, Freeagent and Xero hoping to write the complex code that has to interpret all of the new tax bands for their payroll software will have to wait until this is done before it gets started on that process. This is predicted to be in the week commencing 20th February. This will give software developers little over a month to get things right before the new payroll year (when the tax changes must be applied) starts on 6th April.

And this is just the start

Taxes will be further devolved. From April 2019 Wales is expected to get its own income tax raising powers. And from April 2018 the Northern Ireland assembly will be able to grant its own rate of corporation tax which is expected to be aligned with the Republic of Ireland rate of 12.5%. Now – there is an opportunity for some tax planning….

The UK Government has announced its intention to raise the 40% tax band to £50,000 by 2020. The Scottish Government has signaled that the rise in the 40% band will rise only with inflation which will mean the tax disparity will increase further.