Scottish Rate of Income Tax

During the Scottish Budget in December 2017, it was announced by Finance Secretary Derek MacKay that there would be major reforms to the way in which individuals classed as ‘Scottish taxpayers’ would be taxed on their income.

This involved the introduction of two new tax rate bands and as a result means that from April 2018 there will be a new five tier income tax system for individuals classed as Scottish taxpayers. A new ‘starter rate’ of 19% will apply to income between £11,850 and £13,850. Individuals earning up to £24,000 will be taxed at the 20% basic rate and a new 21% ‘intermediate rate’ will apply to earnings in excess of this up to the basic rate band of £43,430.

It was originally announced that the basic rate band was to be increased to £44,274 – an increase in line with inflation – however, due to an anomaly in the Finance Secretary’s original plans, which would have seen individuals earning between £43,525 and £58,500 receiving a tax cut, the basic rate band will now only increase by 1% from £43,000 to £43,430.

Individuals earning over £43,430 will pay an increased higher rate of 41% on income up to £150,000, and an increased additional tax rate of 46% will apply to any individuals who earn in excess of this.

The result of these changes mean that an individual classed as a Scottish taxpayer who earns over £33,000 will end up paying more in income tax than they will have in the 2017/18 tax year. An individual earning over £26,000 will be paying more in income tax in Scotland than an individual situated elsewhere in the UK.

The new Scottish rates apply only to non-savings income, and do not apply to other income such as bank interest and dividends, which will continue to be taxed at the same rates as the rest of the UK.

An individual will be classed as a Scottish taxpayer where:

• They have a ‘close connection’ to Scotland; or
• Where there is no close connection to Scotland, they spend at least as many days in Scotland as they do in the rest of the UK

An individual will have a close connection to Scotland where their single main residence is located in Scotland. If an individual has a residence in both Scotland and another part of the UK, they will have a close connection to Scotland where their ‘main place of residence’ is located in Scotland and they spend at least as much of their time during the tax year at this residence as they do at any other residence in the UK.

Advice specific to circumstances should be taken and if you require assistance in connection with this or any other tax matter, please contact Magnus Leonard at Rennie Welch on 01573 224391 or by email at magnus.leonard@renniewelch.co.uk.