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Personal tax bands and rates for 2020/21

The picture for Scottish income tax payers has become increasingly complicated in recent years with Holyrood diverging from the UK system by setting 5 rates instead of 3, having 3 of these 5 rates exceed the UK equivalent, and by freezing the higher rate tax threshold since 2018/19.

The rates haven’t changed at all for 2020/21 and the only changes to the tax bands are inflationary increases to the upper limits of the starter, basic and intermediary Scottish rates, but not to the higher rate threshold.

If your income derives solely from employment (including benefits in kind), self-employed or partnership profits, property income in your own name, and pensions, then you will be fully subject to Scottish tax rates. These do interconnect with NIC (set by the UK government) for employment income and profits, so your maximum combined tax rates, counting NI as a tax, for each chunk of income/profits for 2020/21 would be as follows (employed taxes first, self-employed in brackets):

  • £0 to £9,500: no tax or NIC
  • £9,501 to £12,500: no tax, NIC at 12% (or 9% if self-employed) = effective tax rate for employed 12% (self-employed 9%)
  • £12,501 to £14,585: starter rate of tax 19% + NIC as above = 31% (28%)
  • £14,586 to £25,158: basic rate of tax 20% + NIC as above = 32% (29%)
  • £25,159 to £43,430: intermediate rate of tax 21% + NIC as above = 33% (30%)
  • £43,431 to £50,000: higher rate of tax 41% + NIC as above = 53% (50%)
  • £50,001 to £100,000: higher rate of tax + reduced NIC rate of 2% = 43% (effective tax rates now aligned for both employed and self-employed)
  • £100,001 to £125,000: as above but personal allowance eroded, giving effective tax rate of 61.5% + NIC as above = 63.5%
  • £125,001 to £150,000: same rates as £50k-£100k = 43%
  • £150,001 and above: additional rate of tax 46% + NIC as above = 48%

It is clear from the above that this has become incredibly complicated with up to 9 separate rates applying.

This becomes still more complicated when an individual’s circumstances include any or all of the following:

  • Dividend income
  • Interest income
  • Mortgage interest incurred in a personal property business
  • Pension, gift aid and other reliefs
  • Losses
  • Child Benefit (where income is above £50k)

By contrast, someone with a limited company is usually able to restrict the income subject to NI and Scottish income tax rates and take the bulk of their profits as dividends. These avoid NIC, with the added benefit that the higher rate threshold is £50k rather than £43,430, as dividend (and interest) income is taxed based on the UK thresholds.

Contrast a tax rate of 7.5% on dividends in the £43,430 to £50,000 income band (after paying 19% corporation tax on those profits) with the 53% tax and NIC that a Scottish employee would pay on salary in the same bracket and you’ll note that company status is even more attractive tax-wise for a Scottish business owner than one elsewhere in the UK, for whom the income tax/NIC rate on the same chunk of income would be just 32%.

Contact us now if you’d like to discuss your final remuneration/distributions for 2019/20 or your plans for the new tax year.

March 16, 2020

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