TaxDec 14 2017

Scotland shakes up income tax bands

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Scotland shakes up income tax bands

Middle and high earners will pay more income tax in Scotland than the rest of the UK as its government flexed is new powers today (14 December).

The Scottish Parliament was given power to control income tax rates and bands last year in a series of reforms following 2014's independence referendum.

Today's reforms mean those earning £24,000 or more tax than people earning the same amount in England, Wales and Northern Ireland, while those earning below this will pay less or the same.

Scotland's cabinet secretary for finance, Derek Mackay, froze the basic rate of income tax at 20p but introduced an intermediate 21p rate for those earning between £24,000 and £44,273, to increase in line with inflation.

Meanwhile the higher rate band and the additional rate in Scotland will both go up by 1p to 41p and 46p in the pound respectively.

He also introduced a new 19p starter rate between £11,850 and £13,850.

The changes to the tax bands means those earning between £44,274 and £45,000 will pay twice as much in Scotland since the higher rate of 40p kicks in later in the rest of the UK.

Mr Mackay said: "This will ensure no one earning less than £33,000 will pay any more in income tax than they do now."

He added the measures meant 55 per cent of all Scottish taxpayers, those earning up to £26,000, would pay “marginally less than they would if they lived elsewhere in the UK”.

The changes will allow the Scottish government to invest an extra £164m in public services and the economy, he said.

In 2016 Scotland was given the ability to set its rates by taking the UK rates as a starting point and then reducing them by ten basis points before adding tax back.

So far, they have simply added the ten basis points back to keep the rates the same as in the UK although they made a minor change by not raising the threshold at which people start to pay the 40 per cent tax from April this year, as was the case in the rest of the UK.

The Scottish government raised the need to reform income taxes in a discussion paper in early November, in which it mulled over changing the basic rate of tax collected in Scotland.

Rachel Vahey, product technical manager at Nucleus said the changes could see some tax payers miss out on the pension tax relief due.

She said: "Those who contribute to a scheme that operates relief at source receive 20 per cent tax relief direct from HMRC to their pension scheme, and can claim any tax relief above 20 per cent.

"They usually do this through their self-assessment tax return, although they can also notify HMRC direct who may adjust their tax code to give them this additional relief, provided they are not an additional rate taxpayer.

"However, this relies upon individuals taking action to claim their tax relief, and unfortunately, it’s doubtful many people earning just above £24,000 will bother, so missing out on the tax relief due them."

Steven Cameron, pensions director at Aegon, called for clarity on how the new tax bands will be treated in terms of pension tax relief.

He said: “We need urgent clarification that those paying 21 per cent, 41 per cent or 46 per cent will now be entitled to more relief.

"But perhaps more importantly, the Scottish government must make clear that those paying 19 per cent won’t have to pay something back to the tax man.”

Colin Rodger, director at Glasgow-based Alexander Sloan Financial Planning, said: "By introducing what they are billing as a 'progressive' tax system, the Scottish government is looking to stamp its own distinctive approach on tax raising.

"In 1977 the UK had 10 tax bands, simplified by 1988 into two, so Scotland is now going down the route of reversing this now with five bands.

"For service providers such as payroll and tax it is more complicated, and I’m not convinced at the moment that the benefits compensate for the consequences of this."

carmen.reichman@ft.com