Scottish taxpayers need more clarity on the effect of income tax changes

21 February 2017

Shirley McIntosh

Today’s historic vote in Holyrood on setting separate Scottish income tax rates and bands adds yet further complexity to an already complex UK tax code.

We may think that we are starting to understand the implications of the new Scottish Income Tax (SIT) that will apply to Scottish taxpayers from 6 April 2017, but what about the wider implications? 

The recent Budget in Scotland was the first chance for the Scottish Government to use its new devolved powers. Although it didn’t make too many changes, it did amend the higher tax rate threshold. This means that the higher rate band of 40 per cent will apply to incomes above £43,000 in Scotland, as opposed to £45,000 in the rest of the UK. So from April 2017, Scottish higher rate tax payers will pay up to £400 per annum more in tax than their counterparts elsewhere in the UK on the same earnings.

It may be a small change but the implications of a divergence in income tax rate will have a significant knock on effect to other taxes and tax reliefs, as the SIT only applies to the non-savings and non-dividend income of Scottish taxpayers. With the exception currently of Land & Buildings Transactions Tax and Landfill Tax, all other taxes are reserved to Westminster. 

Take National Insurance Contributions (NIC) for example. The Upper Earnings Limit is aligned with the higher rate threshold but the power to set rates and thresholds for NIC remains exclusively with Westminster, so as it stands Scottish taxpayers will be subject to the lower threshold for income tax at around £43,000 and the higher threshold of £45,000 of NIC purposes. 

So any personal tax that is reserved and which is calculated by reference to the higher rate threshold will be calculated according to the legislation using the £45,000 level rather than the £43,000 Scottish figure. This impact spreads to areas such as childcare vouchers, savings allowances and capital gains taxes. 

In all these cases our understanding is that it will be the £45,000 figure for the higher rate threshold that will apply. However, the legislation is not specific. It does appear that multiple calculations will be required to establish a Scottish taxpayer’s liability and a greater reliance will be placed on the ability of computer systems to get it right. Due to this added complexity, Scottish taxpayers may face an increase in tax miscalculations in the future. 

We are awaiting guidance from HMRC on the matter, but at a time of many uncertainties surely Scottish taxpayers deserve more clarity on what impact the divergence will have in real terms for them. 

For more information please get in touch with Shirley McIntosh, or your usual RSM contact.