PAYROLL INSIGHT
Scottish income tax ahead
Diana Bruce, MCIPPdip, CIPP senior policy liaison officer, outlines impending changes that may affect UK employers
T he 2017–18 tax year will see, for the first time, a variance in the income tax thresholds to be used between Scottish rate taxpayers and those in the rest of the UK (rUK). Since 2015–16, a proportion of Scottish spending has been funded by revenues from land and buildings transaction tax and the Scottish landfill tax. In 2016–17, the Scottish Parliament was able to set the Scottish rate of income tax, a power provided by the Scotland Act 2012. In 2017–18, the Scottish Parliament will have the power to set all income tax rates and bands (except the personal allowance, which remains reserved) that will apply to Scottish taxpayers’ non-savings and non- dividend income. In parallel with the devolution of new powers, a fiscal framework was negotiated and agreed between the UK and Scottish Governments which sets out the financial arrangements which underpin and support the new powers. The fiscal framework also determines how the Scottish Government’s block grant will be adjusted in light of its new fiscal powers. Proposed rates and bands 2017–18 In December 2016, the Scottish Government published a draft budget (www.gov.scot/budget) proposing that the threshold for the Scottish higher rate of income tax should increase by inflation to £43,430 for the 2017–18 tax year. This
means that more revenue will be raised in Scotland than it would under the UK Government’s tax policy of increasing the higher rate threshold faster than inflation.
increase by the rate of inflation
as originally proposed but instead would be held at the 2016-17 level. The effect will be an increase in income tax revenues as more Scottish taxpayers will be subject to higher rate income tax and those already within this band will find more of their earnings are subject to it. From 2021, the Scottish Government has proposed that a new zero-rate band will be introduced which will, in effect, take the ‘tax free’ allowance (personal allowance) for Scottish taxpayers from £12,500 (UK’s target for 2020) to £12,750. Impact on individual taxpayers According to the draft budget, the increase in the higher rate of income tax threshold, when combined with the increase in the personal allowance, would have meant all but the top one per cent of Scottish adults would pay less tax in 2017–18 than they did in 2016–17. Basic rate taxpayers who move into the higher rate band under the proposals for Scotland, but who will remain basic rate taxpayers in the remainder of the UK, will pay approximately £400 more tax per year in 2017–18, as will all existing higher and additional rate taxpayers. However, the increase in the personal allowance does offset the increase in income tax between the basic and higher rate threshold. National Insurance (NI) remains a
...not increase by the rate of inflation as originally proposed but
Also proposed is that the higher rate of income tax should increase by a maximum of inflation in all future years of this Parliament. In relation to the income tax bands, the draft budget included the proposal to freeze the basic rate of income tax at 20 per cent and the higher and additional rates at 40 per cent and 45 per cent respectively from 2017–18. At the time of writing these proposals are still subject to approval by the Scottish Parliament. Indeed, on 2 February the Scottish Parliament debated the proposed Scottish Budget. To secure the support of the Green Party’s members of Scotland’s parliament, Derek Mackay, the Scottish finance secretary, announced that the higher rate threshold for tax year 2017–18 would not instead would be held at the 2016 – 17 level...
Income tax rates Basic rate 20% Higher rate 40% Additional rate 45%
Scottish bands
UK bands
Above £11,500* up to £43,000 Above £43,000 up to £150,000
Above £11,500* up to £45,000 Above £45,000 up to £150,000
Above £150,000**
Above £150,000**
* Assumes person is in receipt of the standard UK personal allowance ** Personal allowance is reduced by £1 for every £2 earned over £100,000
| Professional in Payroll, Pensions and Reward | March 2017 | Issue 28 20
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