The move by the Scottish government in its December Budget to create five tiers of income tax hit an obstacle in the form of resistance from the Green Party. A compromise was reached and on 20 February Holyrood confirmed by 67 votes to 50 the new tax structure. As a reminder, for 2018/19 Scottish taxpayers will face the following tax bands:
• These rates apply to non-dividend, non-savings income only;
• UK-ex Scotland rates apply to dividend and savings income;
• UK-ex Scotland tax bands apply to capital gains tax; and
• Scotland does not set NIC rates or limits, so there is now a £2,920 gap (£46,350 – £43,430) between the UK-wide Upper Earnings/Profits Limit (set in line with the UK ex-Scotland higher rate threshold) and the starting point for Scottish higher rate tax. The result is a marginal rate in that band for Scottish residents of up to 53% (41% + 12%).
One fascinating problem which has emerged is the transferable tax allowance for married couples and civil partners. Section 55B(2)(b) of the Income Tax Act 2007 makes it a requirement for eligibility that “the individual is not, for the tax year, liable to tax at a rate other than the basic rate, the dividend ordinary rate or the starting rate for savings”. While Scotland kept a 20% basic rate (which solves relief at source issues), it has slotted in a 21% intermediate rate above, starting at £12,151 of taxable income. How a Scottish intermediate taxpayer (rates set in Scotland) will be able to claim the transferable allowance (allowances set UK-wide) is furrowing a few brows in Holyrood and Westminster, according to weekend press reports.
In 2019 Wales will be able to set its own tax rates. Scotland is providing it with a useful insight into where the bear traps are located.
As tax year end approaches, there is still time to make use of your available reliefs and allowances.
This tax year end planning checklist covers the main planning opportunities available to UK resident individuals and will hopefully help to inspire action to reduce tax for the 2023/24 tax year and to plan ahead for 2024/25.
As tax rate band thresholds are changing, understanding the impact on high rate taxpayers and the economy is crucial.
It was recently revealed in the media that the amount we need to enjoy a ‘moderate’ retirement has increased by £8,000 per annum, a 38% increase, in just one year.