Very broadly, a UK taxpayer is a Scottish taxpayer if their main home is in Scotland. A Scottish taxpayer will pay Scottish rate income tax on their non-savings and non-dividend income. All other personal taxes on income and capital gains tax will be paid at the rates applicable to the rest of the UK.
From 6 April 2017, the income tax bands for Scottish taxpayers diverged from those for the rest of the UK, resulting in a £43,000 higher rate threshold instead of the standard £45,000.
On the face of it, this is a difference of up to £400 in the tax payable, assuming that there is a full-standard personal allowance.
Savings income
Since 6 April 2016, there has been a personal savings allowance (PSA) of £1,000 for basic rate and non-taxpayers, and £500 for higher-rate taxpayers.
When determining whether a Scottish taxpayer is a higher rate taxpayer it is the UK tax bands that are used not the Scottish tax bands. Any savings income in excess of the PSA is then taxed according to the UK band in which it falls. See Box One.
Dividend income
The £5,000 dividend allowance has also applied since 6 April 2016. This will be applied in a similar way as the PSA in that any dividends above the dividend allowance will be taxed according to the UK band in which they fall. See Box Two.
Transferrable tax allowance
Since April 2015, an individual can transfer 10 per cent of their personal allowance to their spouse or civil partner in the form of a tax credit against their tax liability.
They can make the transfer provided that neither of them pays tax at a rate other than the basic rate, the Scottish basic rate, the dividend ordinary rate or the starting rate for savings. See Box Three.
Capital gains tax
Capital gains tax (CGT) is applied to capital gains above the exempt amount (£11,300 in 2017/18). The gain is added to the individual’s taxable income.
Any gain that then falls below the higher rate threshold is taxed at 10 per cent and any remainder is taxed at 20 per cent (assuming that the gain is not on residential property or carried interest).
When calculating the CGT for a Scottish taxpayer it is the UK higher rate threshold that should be used. See Box Four.
National Insurance
National Insurance (NI) and income tax is often thought of as a combined tax on employment income.
Employee National Insurance is paid on the employment income received in the pay period.
With some exceptions, it is 12 per cent on earnings between the primary threshold (£8,164 pa 2017/18) and the upper earnings limit (£45,000 pa 2017/18), and 2 per cent above the upper earnings limit. This is still the same for Scottish taxpayers as it is for UK.
In the rest of the UK, the upper earnings limit is the same as the higher rate threshold for income tax.
Assuming a full standard personal allowance, this will effectively give a combined employment tax that increases when (broadly) employment income reaches £45,000, which is from 32 per cent (20 per cent income tax plus 12 per cent NI) to 42 per cent (40 per cent income tax plus 2 per cent NI).
A Scottish taxpayer who is in exactly the same circumstances will have employment tax that increases when employment income reaches £43,000, from 32 per cent (20 per cent income tax plus 12 per cent NI) to 52 per cent (40 per cent income tax plus 12 per cent NI), before dropping back to 42 per cent (40 per cent income tax and 2 per cent NI) when employment income reaches £45,000.
Pension tax relief
Personal, employee and third- party pension contributions receive tax relief based on the basic rate of tax.
Although this is currently the same, it is possible that in future the basic rate of tax for Scottish taxpayers could be different from the UK basic rate. This would not change the entitlement to tax relief, but it would complicate the way in which the tax relief is paid on contributions to Relief at Source pensions, such as personal pensions.
The current guidance from HM Revenue & Customs is that the pension scheme would have to apply the UK rate unless, before the first contribution of the tax year, HMRC has informed the pension scheme that the Scottish rate should be applied.
The individual would need to sort out any difference in the rate applied with HMRC at the end of the tax year. See Box Five. Although the differences in personal taxation between Scottish taxpayers and taxpayers in the rest of the UK may currently have a relatively small financial impact, it is clear that this difference will cause significant complication.
Phil Warner is head of technical at Hargreaves Lansdown
