At the present time, the only difference in tax rates between Scotland and the rest of the UK (aside from the Land and Buildings Transaction Tax) is the fact that in Scotland you would pay income tax at 40 per cent when your earnings reach £43,000 while you would continue to pay income tax at 20 per cent in the rest of the UK until your earnings reach £45,000. That is because income tax rates and thresholds are devolved to the Scottish Government unlike other taxes.
There has been considerable confusion in the press that as a consequence of this change in Scotland a ‘higher rate’ taxpayer is different to a ‘higher rate’ taxpayer in the rest of the UK. However, because only certain matters are devolved to the Scottish Government and because most matters remain reserved to the UK Government, this is not the case.
For example, take Class 1 NIC. This is not devolved but remains reserved to Westminster. Consequently everyone in the UK pays Class 1 NIC at 12 per cent on their earnings up to £45,000 and 2 per cent thereafter. It makes no difference that you are a ‘higher rate’ taxpayer in Scotland but not in the rest of the UK.
Equally, take the personal savings allowance which provides £1,000 of interest tax-free for UK basic rate taxpayers, £500 for higher rate taxpayers and £0 for additional rate taxpayers. As this relief is reserved to Westminster, it’s the UK thresholds which determine the allowance, regardless of whether you are considered to be a Scottish higher rate taxpayer.
We should not be confused about the higher rate emphasis. While it is true that Scottish taxpayers do pay 40 per cent at a different level it makes no difference to UK allowances and reliefs.
Simple when you know your devolved from your reserved.
For more information please get in touch with Stephen Hay, or your usual RSM contact.