Are You Feeling a Little ‘Out of Kilter’ with our Scottish ‘Tartan’ Tax ?

The 2018/19 Scottish budget was passed by Holyrood on 21 February, but what does this really mean for Scottish Tax Residents?

Tax ‘Winners 

Derek MacKay was keen to confirm the many winners, including those individuals earning less than £26,000, who make up around 55% of the Scottish tax paying population. They will now, comparatively speaking, pay less tax than their English counterparts.

Tax ‘Losers’

However, the losers include some 1.1M Scots, who will now pay more tax than people in England on the same earnings.

Highest Rate of Marginal Tax and National Insurance rate in the UK

An unfortunate headline, but one impact of these changes results in Scottish resident employees earning between £43,430 and £46,350, now paying 53% tax and national insurance, compared to 32% in the rest of the UK. This 53% rate, is actually some 6% higher than someone in England earning £1M a year, who then receives just £1 extra in earnings.

In addition, individuals earning over £100,000 will lose 63.5% in tax and national insurance on every pound up to £123,700, as their personal allowance is tapered away to zero, compared with 62% in the rest of the UK.

Working the numbers

It’s complicated !

HMRC fully accept their tax calculators haven’t been able to cope since changes to savings allowances in 2016, and taxpayers have faced unnecessary tax bills as a consequence.

This doesn’t provide taxpayers with any confidence that they will get it right for 2018/19, particularly if you are someone who will paying tax on income partly at English rates, and some at Scottish rates, which involves also having to take into account different tax bands in both countries, on the different sources of income.

How will this affect the Business Community ?

Firstly these tax changes only apply to individual taxpayers, not corporate bodies, and only on non savings income. So income from employment, self employment, partnerships, or rents from property investments, will be included in these new rates, but UK ‘English’ rates continue to apply to investment income.

This means shareholders of Limited companies could pay themselves dividends, take advantage of the 2018/19 £2,000 dividend savings allowance, and continue to pay English rates of tax. The added bonus of paying dividends rather than salary, is the National Insurance savings for both shareholder/ company.

Combining this with reducing corporation tax rates, will inevitably result in some unincorporated business, or investment property owners rethinking their current legal structure, and considering incorporation more than ever before. The tax and national insurance savings are attractive, but the compliance and administration costs could be prohibitive, so professional advice must be taken, especially where there are assets held in the business.

HMRC famously coined the phrase ‘Tax doesn’t have to be taxing’. For Scottish Residents, I would definitely beg to differ.

For more information, please contact Lynn Gracie, or your usual AAB contact.