The new rates of Scottish income tax - a thistle in your side?

AT the end of last year, the Scottish Government announced income tax changes that, from April 6, this year, will see middle earners paying more tax than the rest of the UK, with some on lower incomes paying less.

What are the changes?

Scottish taxpayers will have to deal with more income tax bands, compared with the rest of the UK.

The two new bands are —

  • A 21% ‘intermediate rate’ for those earning more than £24,000
  • A starter rate of 19% for those being paid between £11,850 (assuming they receive standard UK personal allowance) and £13,850

The basic rate tax of 20% applies between £13,851 and £24,000. The higher rate kicks in for those earning between £43,430 and £150,000, and will increase from 40% to 41%, while the top rate rises from 45% to 46%.

Those being paid more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over that amount.

What do the figures mean?

Under the changes, some basic rate taxpayers will pay less, but those earning about £33,000 a year will pay more. For example, if you earn £40,000 annually, you’ll pay around £140 more a year than the rest of the UK.

Importantly too, HMRC will determine whether or not you’re a Scottish taxpayer based on your main residence, so it’s crucial to let them know if you’ve changed address.

What about pension relief?

While we now have a more complex set of tax bands than the rest of the UK, we still need to fall in line with the rest of the country when it comes to tax relief for pension contributions.

It’s important to be aware of the tax relief for each band, especially for middle and higher earners, you don’t miss out on any additional amounts you’re entitled to.

Taxpayers whose earnings are in the starter and basic rate bands (or people who have no earnings) will be eligible for tax relief at 20%, claimed back by the pension provider.

To illustrate, if you pay £100 into your pension then £125 will be added to your pot.

However, if you pay tax at the intermediate rate, you’ll need to claim the additional 1% you’re entitled to yourself through self assessment, or by contacting HMRC. This may seem a lot of work, but over the years, this seemingly small amount will add up, and it’s better off in your pension pot than anywhere else.

There’s good news too for those in the higher tax bands who qualify for greater relief on pension contributions compared with the rest of the UK because of the increased rates.

Again, higher and top rate earners will need to claim back additional tax relief, 21% and 26% respectively, themselves or through self assessment.

With that in mind, perhaps it’s time to increase those pension contributions.

Contact our tax specialists to find out more about how the new rules for the 2018/19 financial year affect you, and to make sure you don’t miss out on the tax relief you’re entitled to.