On 23 February the Scottish Parliament voted in favour of keeping the higher rate income tax threshold for ‘Scottish taxpayers’ at £43,000 and passed its budget for 2017/18. This means that from 6 April 2017, the threshold at which 'Scottish taxpayers' start paying 40 percent tax will differ from that for other UK taxpayers.
'Scottish taxpayer' Status
In summary, an individual will be a 'Scottish taxpayer' in a particular tax year if he or she is UK resident for income tax purposes and either:
For further information on ‘Scottish taxpayer’ status, please refer to HMRC’s Scottish Taxpayer Technical Guidance.
Scottish Rates of Income Tax
Whilst the Scottish rates of income tax will remain the same as those that apply to other UK taxpayers (20 percent, 40 percent, 45 percent), the level of income at which a Scottish taxpayer will start paying tax at 40 percent will be lower in Scotland (£43,000) than for other UK taxpayers (£45,000).
This means that Scottish taxpayers earning over £45,000 will pay £400 more in income tax per annum than other UK taxpayers with the same level of income.
Interaction of the Scottish rates of income tax and NIC
The Scottish Government does not have control over setting NIC rates and thresholds. The NIC rates and thresholds which are set by the UK Government therefore apply to all individuals whose employments are insured under the UK social security system.
As the lower NIC rate of 2 percent does not apply until an individual earns £3,750 per month, or £45,000 per annum, Scottish taxpayers who are also subject to UK social security (which will be the majority) will have an effective tax and NIC rate of 52 percent (40 percent tax + 12 percent NIC) on the portion of income between £43,000 and £45,000. This total effective tax and NIC rate will then drop to 42 percent (40 percent tax + 2 percent NIC) when earnings exceed £45,000.
Other UK taxpayers whose employments are insured under the UK social security system will have an effective tax and NIC rate of 32 percent (20 percent tax + 12 percent NIC) on the portion of income between £43,000 and £45,000.
The change in the income tax thresholds in Scotland, from those in the rest of the UK, adds additional complexity to elements of the payroll process and compliance. Additionally, we expect that employees will have questions about the changes and that these are likely to be directed to their employer's payroll team in the first instance.
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