Scottish tax bills moving North

20 December 2016

Last week the Scottish Finance Minister delivered his Budget and announced that, unlike the rest of the UK, he would not be increasing the 2017/18 higher rate tax threshold by £2,000 but would instead increase it by only £430 in line with inflation.

That means that with effect from 6 April 2017 there will be differential higher rate thresholds depending on where in the UK a taxpayer lives.

Apart from the headline of the change, there are already a number of apparent side effects caused:

  • Dividends and savings income continue to be taxed in line with UK wide thresholds, so its only earned income which is affected;
  • Capital Gains Tax rates continue to be computed at 10% or 20% based on the UK thresholds, not the Scottish ones; and
  • There is no corresponding National Insurance (NI) change, so there seems to be a small earnings bracket of £1,500 or so where Scottish employees could pay both 40% Tncome Tax and 12% class 1 NI.

There have long been subtle differences in public policy in the UK’s different countries including university tuition fees, healthcare policies, and more recently the abandonment North of the border of Stamp Duty Land Tax in favour of land and buildings transaction tax. But this is the first time that something as pervasive as Income Tax has differed depending on where on this island you live and work.

There has already been activity by HMRC in the last 12 months or so to identify ‘Scottish Taxpayers’ and until now that’s done little more than allow PAYE coding notices with an S incorporated into them. Moving forward, the distinction will become more and more important and it is highly likely that this is only the first divergence of many. For example, the Scottish Government also have the power, so far unexercised, to set their own Income Tax rates – a power which has also this month been agreed in principle for the Welsh Assembly.

Devolution is clearly here to stay, and the rhetoric surrounding the Scottish National Party’s desire to keep Scotland inside the single market, or even the EU, is bound to play a part in the future exercise of devolved powers.

Whether you’re an individual living or working in Scotland, or a business with Scottish based operations, an awareness of the pending changes and your responsibilities in relation to them is essential.

If you have any queries in relation to the above, please do not hesitate to contact your local UHY tax expert. Alternatively, to read more of our tax blogs please click here.