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From 6 April income tax will hit Scots harder than others in the UK

3 April 2019

Edinburgh-based Steven Cameron, pensions director at Aegon, highlights that from this weekend rates of income tax will hit Scots harder than others in the UK. But pensions offer a means of cutting their tax bill, he suggests.

From 6 April, many people living in Scotland will be paying substantially more income tax than someone on equal earnings in the rest of the UK. In his October Budget, the UK Chancellor announced that from April, those earning up to £50k would not pay higher rate (40%) income tax.

But as income tax bands and rates are ‘devolved’, this didn’t apply to workers in Scotland and the Scottish Finance Secretary dashed hopes of an equivalent rise for Scots, leaving the higher rate tax threshold unchanged at £43,430, £6,570 lower than in the rest of the UK.

This means people in Scotland start paying higher rate tax on earnings £6,570 sooner than their counterparts elsewhere in the UK. Many also pay income tax at higher percentage rates, which for earning above £43,430 in Scotland is 41%.

Someone earning £50k in England, Wales or Northern Ireland would pay £7,500 in income tax from the 2019/20 tax year, while someone earning the same figure in Scotland would pay £9,044 which is £1,544 a year more or £128 a month extra.

For many, this will look like a significant sum and many will be looking for the Scottish Government to demonstrate what extra services Scottish taxpayers are receiving for the difference.

To add insult to injury, Scots face a double whammy because in line with the rest of the UK, they will pay National Insurance at a rate of 12% on earnings up to £50k, before this reduces to 2% on earnings above this level.

So from next April, a Scottish resident earning £50k or above will pay an extra £340 per year in National Insurance. While this will also be the case across the UK, someone earning £50k in the rest of the UK, is saving £860 a year in income tax, giving them an overall boost to take-home pay of £520 a year from next April compared to currently.

Using pension contributions to cut tax bill

For Scots earning between £43,431 and £50,000, one perfectly legitimate or ‘canny’ way of avoiding paying higher rate tax is through paying more into your pension. Contributions to pensions are granted ‘tax relief’ at the individual’s highest marginal income tax rate. This means someone in Scotland earning £50,000 will be entitled to up to 41% tax relief on their pension contributions, whereas someone earning the same in the rest of the UK would be entitled to only 20% tax relief. For this individual in Scotland, a pension contribution of £6,570 would avoid them paying higher rate tax entirely, giving a total income tax saving of £2693 a year.

Some employers will also allow individuals to ‘sacrifice’ part of their salary in return for a pension contributions being paid by your employer. This has the further benefit of meaning the individual doesn’t pay NI on the amount sacrificed. Someone earning £50,000 paying pensions contributions through salary sacrifice could save not only 41% income tax but also 12% National Insurance. The NI saving by sacrificing £6,570 could amount to £788.

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