Scottish Income Tax: how different is it to the rest of the UK?

The Financial Scrutiny Unit (FSU) is often asked what the difference is between income tax in Scotland and in the rest of the UK, especially with the changes announced to Scottish Income Tax for 2018-19.

What exactly is “Scottish Income Tax”?

Under the Scotland Act 2016, the Scottish Government has had the power to set rates and bands for income tax on earnings (“non-savings, non-dividend income”, or NSND) since April 2017. This extended the much more limited powers it had over NSND income tax in 2016-17.

Income tax on savings and on dividends continues to be set by the UK Government and is thus the same across the whole of the UK. The UK Government also retains power over personal allowance and income tax exemptions. On a more technical note, the Scottish Government does not have the power to change the definition of income components – so it cannot start taxing dividends under the NSND income tax powers it has for example.

Income Tax across the UK continues to be administered and collected by HM Revenue and Customs (HMRC) and all revenue flows to HM Treasury. Income tax from “Scottish taxpayers” is then transferred to the Scottish Government and goes to fund the Scottish budget.  “Scottish taxpayers” are determined by their place of residence, not their place of work, and identified by the letter “S” at the front of their tax code – this is explained in HMRC’s technical guidance.

HMRC bills the Scottish Government every year for the costs of running the Scottish Income Tax system.

What is changing in 2018-19?

There was one change to income tax in 2017-18, which set the higher rate threshold at £43,000 compared to £45,000 in the rest of the UK (or “rUK”). However, from 6 April 2018, a completely new income tax structure is being introduced, adding two new bands (starter and intermediate) to the existing three (Table 1).

Table 1: Income tax on earnings in Scotland, 2018-19

Rate

Taxable income

Personal allowance

0%

Up to £11,850
Starter

19%

£11,850 to £13,850
Basic

20%

£13,851 to £24,000
Intermediate

21%

£24,001 to £43,430
Higher

41%

£43,431 to £150,000
Top

46%

Over £150,000

Compared to last year, Scottish taxpayers earning under £33,000 pay less tax in 2018-19 than in 2017-18.

Table 2 shows income tax on earnings in the rest of the UK in 2018-19.

Table 2: Income tax on earnings in the rest of the UK, 2018-19

Rate

Taxable income

Personal allowance

0%

Up to £11,850
Basic

20%

Up to £46,350
Higher

40%

£46,351 to £150,000
Additional

45%

Over £150,000

Table 3 shows the difference in tax paid at various income levels in Scotland and the rest of the UK in 2018-19. For instance, someone earning £30,000 will pay £40 more in tax per year in Scotland than in the rest of the UK in 2018-19. All Scottish taxpayers who earn under £26,000 pay less tax in Scotland that in the rest of the UK in 2018-19.

Table 3: Difference in annual NSND income tax liability between Scotland and the rest of the UK, 2018-19

Income (£)

Annual difference (£)

15,000

-20

20,000

-20

30,000

40

50,000

824

100,000

1,324

500,000

5,443

What about things like National Insurance contributions, Marriage Allowance, Gift Aid and Pension tax relief?

The UK Government has agreed to make the necessary legislative amendments needed for Marriage Allowance and Gift Aid for these to continue working in Scotland in the same way as before.

Marriage Allowance allows people to transfer some of the personal allowance to partner/spouse. In 2018-19 Marriage Allowance will be available to all eligible Scottish taxpayers who pay tax at the starter, basic and intermediate rates.

Donations provided to charities through Gift Aid allows charities and community amateur sports clubs to claim an extra amount from the UK Government. It also allows taxpayers above the basic rate to claim some tax back. Gift Aid in Scotland in 2018-19 will continue to be paid to charities at the basic rate, and Scottish taxpayers will be able to claim the correct amount of additional relief if they are intermediate, higher or top rate taxpayers.

Pension tax relief is a bit more complicated. This is a tax relief on private pension contributions that is based on taxpayers’ marginal rate.

Firstly, members of pension schemes who get pension tax relief through the “net pay” mechanism, and have their pension contributions deducted before income tax is calculated, will continue to receive Pension tax relief by default at their marginal rate of tax, including the new and newly increased Scottish rates.

Secondly, those administering a pension scheme using the “Relief at Source” mechanism will continue to claim tax relief at the rate of 20% for members who are Scottish taxpayers.

  1. For Scottish pension scheme members who pay no tax or are “starter” rate taxpayers (i.e. pay some tax at 19%), scheme administrators will continue to claim relief at 20% in respect of these individuals, and HMRC will not recover the difference between the Scottish starter and Scottish basic rate.
  2. Scottish pension scheme members who are “intermediate” rate taxpayers (i.e. pay some tax at 21%) will be entitled to claim the additional 1% relief due on some or all of their contributions above the 20% tax relief paid to their scheme administrators. They will have to claim the additional relief for 2018-19 by contacting HMRC, or through their Self-Assessment return if they already complete one.
  3. Scottish pension scheme members who are “higher” or “top” rate taxpayers (i.e. pay some tax at 41%, or 46% respectively), will be able to claim additional relief on their contributions up to their marginal rate of tax in the usual way by contacting HMRC, or through their Self-Assessment return if they already complete one.

We discussed national insurance contributions (NICs) in a previous blog. Scottish taxpayers earning between £43,431 and £46,350 in 2018-19 will be paying the “53% rate”, equal to their top marginal rate of income tax plus their NIC. This is 21 percentage points higher than taxpayers in the rUK at the same income level.

Anouk Berthier, Senior Researcher, Financial Scrutiny Unit