Scottish Income Tax Changes

Scottish Income Tax changes fair or unfair?

Following historical vote, in February, Scotland has new Income Tax rates.

For the first time in Scottish Parliament’s history MSPs passed measures setting income tax rates and bands in Scotland. This is natural progression following Scottish Devolution on 1 of July 1999. Not all is a simple as it seems.

On the day of the vote, in February, Finance Secretary Derek Mackay said:

“This is a historic day for Scotland – the first time ever that rates and bands of income tax are being set by the Scottish Parliament in line with Scotland’s needs and priorities,” said “But the passing of the Scottish Rate Resolution is much more about our future than it is about our history.”

Derek Mackay views control of tax as symbolic for Scottish parliament. For many of the ordinary Scottish taxpayers, taking care of their own future may think differently from Derek Mackay. From April, taxpayers earning over £43,000 a year will now be paying more tax annually.

This means that if you are earning above the £43,000 a year threshold you will pay the 40p tax rate. In real terms you will pay £400 more a year in income tax than those living elsewhere In the UK.

Of course income tax is not the only payment due there’s also National Insurance. Scotland does not have control over National Insurance rates. Therefore the Scottish taxpayer earning between £43,000 and £45,000 will be subject to a combined 52 per cent rate of tax compared to a similar salary elsewhere in the UK.

Here’s an explanation of the tax anomaly:

In Scotland if you are an employed taxpayer earning between £43,000 and £45,000 you will pay:

  • higher rate income tax of 40% on this £2,000 margin plus
  • National insurance Contributions of 12%

Therefore an employed taxpayer earning between £43,000 and £45,000 is subject to 52% rate of tax, in total on this margin compared to 32 percent in the rest of the UK. Different National Insurance rules apply for the self employed.

“Conservative finance spokesperson Murdo Fraser said around 374,000 people will face higher tax bills.”

The anomaly has opened up a can of worms for Scottish tax payers. It will for example also be possible to be a higher rate income tax payer in Scotland but pay capital gains tax as a basic rate taxpayer in line with the rest of the UK!

What next for Scottish taxpayers?

Should taxpayers lobby for National Insurance controls as well?

Should National Insurance and Income Tax in Scotland be combined?

As a tax expert and taxpayer in Scotland there will inevitably be more anomalies as the Scottish tax system diverges from the rest of the UK. One thing is for sure there will be further tweaks and changes and at Murrison & Wilson we will stay on top of clients’ finances.

If you have any concerns or questions about the changes to the Scottish Tax system please do get in touch on 0141 290 0262 or email before the 6 of April.

Warm regards

Bruce Wilson, Director, Murrison & Wilson

Tax Specialist.

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