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Income tax disparity created between Scotland and rest of UK

13 December 2018

The Scottish higher rate tax threshold has been frozen following the latest Scottish Budget, creating a disparity between the income tax regime in Scotland and the rest of the UK. 

The Scottish Finance Secretary Derek Mackay announced on 12 December that the income tax threshold in Scotland would remain unchanged at £43,430, residing £6,570 lower than the rest of the UK. Many Scots also pay income tax at higher percentage rates, which for those earning in excess of £43,430 is 41%.

The disappointing news for Scottish workers follows an earlier announcement by the UK Chancellor Philip Hammond in his Autumn Budget that from April, those earning up to £50,000 would not pay higher rate income tax.

The disparity in tax regimes means someone earning £50,000 in England, Wales or Northern Ireland would pay £7,500 income tax from the 2019/20 tax year, while someone earning the same figure in Scotland would pay £9,044, amounting to £128 more a month.

Steven Cameron, pensions director at Aegon, said the “significant sum” will increase pressure on the Scottish Government to demonstrate what extra services Scottish taxpayers will receive for the difference.

Cameron added: “To make matters worse, 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 £50,000 before this reduces to 2% on earnings above this level. So from next April, a Scottish resident earning £50,000 or above will pay an extra £340 per year in National Insurance.”

Cameron pointed out that the only silver lining is pensions tax relief, which is granted at the individual’s highest marginal income tax rate. This will enable someone in Scotland earning £49,999 to qualify for 41% tax relief on their pension contributions, whereas someone earning the same in the rest of the UK would only be entitled to 20% tax relief.

He added: “Some employers will also allow individuals to ‘sacrifice’ part of their salary in return for this being paid as an employer contribution into their pension. This has the further benefit of meaning the individual doesn’t pay NI on the amount sacrificed. Someone earning £49,999 paying pensions contributions through salary sacrifice could save not only 41% income tax but also 12% National Insurance.”

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