Scotland’s plans to freeze both the higher and additional rate income tax threshold will see top earners paying more tax but pension pots will benefit from increased tax relief from April.
Plans announced in the Scottish budget, delivered yesterday (February 7), mean higher earners will continue to pay more in tax than their counterparts elsewhere in the UK, while lower earners continue to be slightly better off.
From April 2020, starter and basic-rate tax bands will increase in line with inflation meaning low earners will take home more of their salary, while the higher and additional-rate tax bands will be frozen at current levels.
According to the Chartered Institute of Taxation (Ciot), Scottish taxpayers earning less than £27,243 will pay less in income tax compared with taxpayers elsewhere in the UK because of the lower starter rate of income tax, which was introduced in 2018.
It also found the point where a taxpayer will pay more income tax in Scotland than they would in the rest of the UK would rise as a result of the budget from £26,993 to £27,243.
Tom Selby, senior analyst at AJ Bell, said: “For Scottish taxpayers the Budget itself hasn’t presented any major horrors, although there have been some tweaks to income tax bands which will impact people’s finances.
“While the personal allowance has been held at £12,500 – keeping it in line with the rest of the UK – the starter and basic-rate bands have risen in line with inflation, allowing low earners to keep a little more of their hard-earned cash from the taxman.
“However, the decision to freeze both the higher and additional-rate bands at a time when earnings growth in Scotland is over 2 per cent means more people will be sucked into paying more tax.”
However, these top earners will benefit from higher tax relief, incentivising them to save more for retirement.
Mr Selby added: “Those who find themselves in this position will have an extra incentive to save in a pension, with the tax relief for higher and top-rate taxpayers set at 41 per cent and 46 per cent respectively, 1 percentage point higher than the rest of the UK.”
The income tax changes are expected to increase the tax take by £51m in 2020/21.
Yesterday's budget was delivered by junior minister Kate Forbes after the sudden resignation of finance minister Derek Mackay earlier on in the day.
The Scottish budget was originally due to be held in December but had to be delayed due to the UK general election.
It also had to be held before the UK budget on March 11 as council and local authority budgets have to be set before the new financial year.
Alexander Garden, chair of Ciot’s Scottish technical committee, said: “While Scotland remains on a broadly similar tax path to last year, the immediate challenge facing the Scottish government will be ensuring that a majority can be found in the Scottish parliament to ensure that Scottish income tax can be collected in the new tax year.