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Scottish Budget 2019 - Income Tax

Our second article on the changes introduced by December 2018’s Scottish Budget focuses on income tax, and the growing gaps between the treatment of Scottish income tax payers and those in the rest of the UK.

Firstly it’s worth going over who is affected by Scottish income tax. This is based on the location of your main residence for the majority of a tax year. There are rules governing situations where taxpayers have homes inside and outside of Scotland, and where taxpayers move during a tax year or have temporary work in another location, so if your circumstances need checking please let us know. It’s also worth remembering that the Scottish rates and thresholds do not currently apply to dividend and savings income. We’ll return to this important distinction later.

Last year the Scottish government introduced two new tax rates and increased the existing higher and additional rates. This year the rates are unchanged so the focus is on the changes to the bands and thresholds, or more pertinently on the lack of changes. While the UK government has pushed the personal allowance up from £11,850 to £12,500 and the higher rate threshold from £46,350 to £50,000, the Scottish government has only made minor changes to the two lowest tax bands and has frozen the higher rate threshold altogether at £43,430.

Scottish taxpayers will still benefit from the increased personal allowance, which is set by the UK, and by the inflationary increases to the 19% and 20% bands. These ensure that Scottish taxpayers earning up to £26,945 pay less income tax than UK taxpayers, but only by a maximum of £20 over the whole tax year. However if your total income above £26,945 includes salary, self-employment profits, pensions or rental income (basically anything other than dividends and interest) then as a Scottish taxpayer you will pay more income tax than those based elsewhere in the UK.

While the differences in the tax rates might seem minor (21% v’s 20%, and 41% v’s 40%), the widening gap in the higher rate threshold results in much bigger variations, especially as National Insurance rates rely on the UK higher rate threshold. As an example, a Scottish taxpayer with earnings of £50,000 in 2019/20 will be subject to combined income tax and National Insurance at 53% on earnings from £43,431 to £50,000, compared to just 32% on the same earnings for someone based elsewhere in the UK.

Note however that if your income is mainly made up of dividends, your tax liabilities will be the same as someone based in England, Wales, or Northern Ireland, and you will benefit from the significant jump in the UK higher rate threshold if your dividends are close to that value.

The recent changes in dividend taxation may have made incorporation slightly less attractive than in previous years, but these changes are definitely increasing the benefits of limited company status for Scottish businesses.

Contact us if you’d like to find out more.

February 17, 2019

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