Triple Whammy for Scots Taxpayers

January 2019
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In the December Budget, Scottish Finance Secretary, Derek McKay, announced inflationary increases from April in the Income Tax bands for starter, intermediate and basic rate Scots taxpayers but not for higher or top rate taxpayers, who now face a triple whammy of:

- a rate of tax 1% higher than the rest of the UK

- a higher rate threshold to be £6,570 lower, and

- 10% extra National Insurance contributions on earnings between £46,350 and £50,000.

Differences in Income Tax across the UK arise due to the Scottish Government having devolved powers to set Income Tax rates and bands, while allowances and National Insurance thresholds and rates are set at Westminster for the whole of the UK. Scottish Income Tax is payable by those with a main residence in Scotland, tested on the basis of where they spend their time and tests such as the address of the GP, bank accounts and motor insurance.

The tax applies to income from employment, self employment, property and pensions. Investment income is taxed at the UK rates. It means that someone earning £50,000 in Scotland will pay £1,544 more in tax than their counterpart in the rest of the UK.

The current and proposed rates of Scottish Income Tax are set out below.

Rate %

2018-19 band earnings

2019-20 band earnings

0

Up to £11,850

Up to £12,500

19 Starter

£11,851-13,850

£12,501-14,549

20 Basic

£13,851-24,000

£14,550-24,944

21 Intermediate

£24,001- 43,430

£24,945- 43,430

41 Higher

£43,431-150,000

£43,431-150,000

46 Top

Over £150,000

Over £150,000

Taxpayers who earn £100,000 - £123,700 (£125,000 from April 2019) receive a reduced personal allowance, losing £1 for every £2 over £100,000.

There is a silver lining for Scots taxpayers paying higher rate, as they can claim extra relief on any pension contributions they make. Whereas their English counterpart, earning £50,000 next year, will only receive relief at 20%, a Scots taxpayer will get 41%.

Payment Methods

The method of payment of pension contributions affects how relief is received. Those paying via their own bank account or into an employer’s scheme on the relief at source method, will only get 20% relief automatically paid to the pension provider. They can then claim the balance from HMRC.

Employers who operate a net pay arrangement will grant all tax relief at the applicable rate, as the deduction is made prior to tax being calculated on pay.

An alternative is salary sacrifice. In return for sacrificing gross pay, the employer promises to pay the gross amount given up into a pension scheme as an employer contribution for the employee. This gives Income Tax relief at the full rate and saves the employee 2% or 12% National Insurance on the payment. Employers save 13.8% National Insurance too. Some employers are willing to add all or some of this saving into the employer pension contribution.

This method of pension payment can be especially beneficial for two groups of taxpayers:

  • High earners (taxable income £50,099 to £60,000 or above) who suffer tax on child benefit. The tax free element of child benefit is reduced progressively for every £100 of taxable income in excess of £50,000 until it is taxed at 100% once income is over £60,000. If salary sacrifice reduces the taxable income below £50,099 tax free child benefit can be fully restored at £1,076 p.a. for the eldest child and £713 p.a. for each subsequent child.
  • High earners with income over the £100,000 threshold, at which the personal allowance is withdrawn at £1 for every £2 of income over this, creating an effective rate of tax and National Insurance of 63%. Sacrifice of gross income to below £123,700 (£125,000 from 2019-20) will enable some or all of the personal allowance to be restored.

Top rate payers have restricted pension savings allowances, once taxable income exceeds £150,000. They still have a full £40,000 allowance for tax year 2015-16 which can be claimed up until 5 April 2019.

While salary sacrifice can be a very tax efficient way of saving for retirement, the sacrifice of income will reduce take home pay and may also affect other benefits, such as life cover and sick pay which are linked to salary, if these are referenced to the post, and not pre, sacrificed pay.

Mortgage lenders may be less willing to lend, but if the sacrifice brings other benefits, such as the restoration of the personal allowance or tax free child benefit payments, the impact on credit rating may be muted. Lenders focus on net income, rather than gross pay, when determining affordability.

Kay Ingram
Director of Public Policy, LEBC

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. All information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation, are subject to change. Taxation advice is not regulated by the FCA.

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