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Scottish Income tax changes

14 December 2017

The Scottish finance minister today confirmed changes to income tax bands for Scottish tax payers. Here the changes are listed in brief with comment on the implications.

Changes in brief:

• A personal allowance of £11,850

• A new Starter Rate of 19% will be introduced for those earning between £11,850 and £13,850

• A Basic Rate of income tax at 20% for those earning over £13,850

• A new Intermediate Rate of 21% for those earning over £24,000

• A Higher Rate of 41% on incomes over £44,273 to £150,000

• A Top Rate of 46% on incomes over £150,000.

Commenting on the effect of the changes, Rachel Vahey, product technical manager at Nucleus, said:

“The Scottish budget proposes introducing two new rates of income tax – a starter income tax rate of 19% for the first £2,000 income (above the personal allowance) and an intermediate income tax rate for earnings between £24,000 – £44,273 of 21%. It also proposes increasing tax rates for higher rate and additional rate taxpayers.

“Pension contributions receive tax relief (generally up to the annual allowance of £40,000 or the individual’s earnings if lower) so if an individual’s tax rate increases then theoretically the relief will also increase. This means some Scottish residents will receive a bigger boost to their pension contributions than others in the UK. Although, the difference may be too small in reality to influence Scottish residents’ behaviour to increase the amount they save for retirement.

“Those who contribute to a scheme that operates relief at source receive 20% tax relief direct from HMRC to their pension scheme, and can claim any tax relief above 20%. 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. Those paying higher rates will probably carry on claiming tax reliefs as they do now.

“In addition, although a lower rate of tax of 19% has been introduced for initial earnings above the personal allowance, we would assume Scottish pension scheme members will continue to get 20% relief on all their pension contributions.

“Introducing varying rates of tax relief between different parts of the UK may open up previous discussions on the future of pensions tax relief, and whether to sever the link between income tax and pensions altogether.”

Gareth James, head of technical services at AJ Bell, added:

“A six tier income tax regime certainly makes things more complicated for Scottish taxpayers. In relation to pensions, keeping the Scottish basic rate at 20% keeps things a lot simpler than they would have been if the basic rate had been changed.

“However, people in the other bands will see some changes. The 41% and 46% rates make pension contributions slightly more attractive for Scottish taxpayers than those in the rest of the UK because they will get more tax relief.

“Contributions paid to pensions by individuals will automatically receive tax relief at 20% and it seems unlikely that 19% taxpayers will have to repay the extra 1% that has been claimed.

“The biggest impact will potentially be for those in the 21% band, where we’d expect people to have the option of reclaiming the extra 1%, just like those in the higher and top rate bands. The Scottish Government says there are 898,000 people in the band so it potentially affects a significant number of people.

“The big question is, how difficult will this be and will people bother? Someone earning £30,000 and contributing 10% of their salary would pay in £2,400, get tax relief at source of £600 and can then reclaim an extra £30. They might feel it is not worth reclaiming the £30 but if they contribute to a pension for 40 years those £30 will add up. If they were invested somewhere else each year for that period it could be worth £3,805.”


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