While Welsh tax is now, in part devolved, the Welsh Assembly had already indicated it would follow the Westminster lead on tax.
For those living in Scotland it wasn’t quite so simple, and they had to wait for the Scottish government to outline its proposals for 2019 to 2020.
In the 2018 to 2019 tax year, the Scottish government flexed its tax-raising muscles and introduced new tiers and rates of income tax for Scottish residents.
So, all eyes were turned to Holyrood during December to see whether it intended to shake up income tax once again.
The Scottish government proposes for 2019 to 2020 keeping the same tiers and rates for income tax but increasing the tax thresholds in line with inflation, except for the higher and top tax rate thresholds which will be frozen.
This is significant; the Scottish rates of income tax are increasingly diverging from those rates applied in the rest of the UK (rUK). This is going to have implications for pension savers and those making income spending decisions.
Claiming tax relief – relief at source pension schemes
Basic rate tax relief of 20 per cent is added to pension contributions paid by Scottish residents to relief at source pension schemes.
Intermediate, higher and top rate taxpayers can reclaim any additional tax relief either by contacting HM Revenue & Customs (intermediate and higher rate taxpayers only) asking for an adjustment in their tax code, or by completing a self-assessment.
Whereas this may be a straightforward task for a higher or additional taxpayer used to dealing with HMRC, someone earning just over £25,000 may feel more reluctant to contact HMRC direct, especially if it means claiming only a very small amount of additional tax relief on their pension contributions.
HMRC promised to look at this issue last year, but we are still to hear its ideas about how to make sure everyone gets the tax relief they are entitled to, even if it’s only a few pounds.
Difference between Scotland and the rUK
The increasing divergence between Scottish rates of income tax and those applying in the rUK means those earning above £26,993 will pay more tax if they are resident in Scotland compared to living in the rest of the UK.
The biggest impact will be felt by those earning between £43,430 and £50,000. They will also pay a higher combination of tax and national insurance contributions (NICs).
For 2019 to 2020, NICs will be paid at 12 per cent on earnings between roughly £8,600 and £50,000, and 2 per cent on earnings over £50,000, regardless of where in the UK the person lives.
These NIC thresholds are aligned to the rUK income tax rates. As NIC thresholds and Scottish income tax thresholds further diverge, Scottish residents will pay 53 per cent combined marginal rate of income tax and NIC on a larger slice of their earnings.
On earnings between £43,430 and £50,000, they will pay 41 per cent tax and 12 per cent NICs (totalling 53 per cent), compared with 20 per cent income tax and 12 per cent NIC (totalling 32 per cent) if they were resident somewhere else in the UK.
Influencing investment and savings decisions
The Scottish rates of income tax only apply to ‘non-savings non-dividend income’, which includes earnings, pensions, rental profits and income distributions from discretionary trusts. Income from investments is taxed at rUK rates.
So, a Scottish resident with earnings between £43,430 and £50,000 will pay income tax at 41 per cent.
But a Scottish resident with investment income in that same range will pay income tax at 20 per cent. This may influence their savings and investment decisions.
The order in which additional funds are accessed from investments and tax-efficient wrappers to supplement earned income is particularly pertinent for Scottish taxpayers in the £43,430 to £50,000 income range.
They may wish to consider tax-free withdrawals from Isas, withdrawals from investment bonds, maximising natural income and realising gains on investments outside their tax-efficient wrappers – which will generally be taxed at no more than 20 per cent – in preference to drawing on their pension income, which will be taxed at the higher rate of 41 per cent.
Those who are still earning and paying into a pension may want to use pension salary sacrifice to reduce their earnings, and so their marginal tax rate, in exchange for a higher employer pension contribution.
Employers may be more willing to offer this, as they save on employer NICs, and some may pass part of this saving onto their employees.
What happens next?
These are just proposals at the moment. The Scottish minority government can only confirm the final rates and thresholds for Scottish income tax once the Scottish parliament has voted, and previous years have seen compromises become necessary to pass the Scottish budget.
The final figures will only be known in February, just weeks ahead of the start of the 2019 to 2020 tax year.
But it’s becoming clearer that Scottish residents have a different set of investment and savings decisions compared to their rUK cousins.
Rachel Vahey is product technical manager at Nucleus
