In today’s blog, here at Tulip Thistle Accountancy, we are going to take a closer look at Income Tax changes for the 2018/2019 Tax year, following the passing of the Scottish Budget by the Scottish Parliament last week.
On the 20 February 2018 the Scottish Parliament set the following income tax rates and bands for 2018/19:
- 19% Starter rate: on income between £11,850* and £13,850
- 20% Basic rate on income between £13,850 and £24,000
- 21% Intermediate rate: on income between £24,400 and £43,430
- 41% Higher rate: on income between £43,430 and £150,000 **
- 46% Top rate: on income over £150,000
Combined, these changes mean that those earning less than £26,000 (1.4 million tax payers) will pay slightly less income tax next year than if they lived elsewhere in the UK ( assuming an unchanged income). This means that 55% of Scottish income taxpayers will pay less tax than if they lived in other parts of the UK in 2018-19. Due to the introduction of the Starter Rate and the increase in the Personal Allowance, every Scottish taxpayer earning less than £33,000 in 2018-19 (1.8 million tax payers) will pay less income tax than they did in 2017-18, for a given level of income.
- If you want to check the impact on your own salary, have a look at attached simple Take home pay calculator on my website, which compares 2017/2018 Tax payable in Scotland with the new system proposed for 2018/2019, and also shows what tax would be due in 2018/2019 if you lived in the rest of the UK (outside of Scotland). Input your salary in the “Yellow” Box and press “ENTER”/”RETURN” for calculations
Are you a Scottish Tax payer?
In order for an individual to be a Scottish taxpayer, they must be UK resident for tax purposes – an individual who is not UK tax resident cannot be a Scottish taxpayer
There are a number of tests to determine Scottish taxpayer status. If, in the course of a tax year, an individual is UK resident for tax purposes, they will be a Scottish taxpayer, for that tax year, if they satisfy any of three tests:
1. They are a Scottish Parliamentarian
2. They have a ‘close connection’ to Scotland through either:
- having only a single ‘place of residence’, which is in Scotland
- where they have more than one ‘place of residence’, having their ‘main place of residence’ in Scotland for at least as much of the tax year as it has been in any one other part of the UK.
3. Where no ‘close connection’ to Scotland or any other part of the UK exists (either through it not being possible to identify any place of residence or a main residence) – through day counting.
Place of residence is clearly therefore key to establishing whether an individual is a Scottish taxpayer***.
For the purpose of Scottish taxpayer status HMRC consider that an individual’s ‘place of residence’ is a place that a reasonable onlooker, with knowledge of the material facts, would regard as the dwelling in which that person habitually lives: in other words his or her home.
Impact on Pension Contributions Relief
Implications for Pension contributions relief have now also been clarified:
Members of pension schemes who get pension tax relief through the ‘net pay’ mechanism (your employer can clarify if this is the case for you) have their pension contributions deducted before Income Tax is applied to their pay, so only pay tax on what’s left. Pension tax relief on these contributions will continue to be given by default at members’ marginal rate of tax, including the new and newly increased Scottish rates.
Relief at source
Pension schemes using the relief at source mechanism will continue to claim tax relief at the rate of 20% for members who are Scottish taxpayers.
For pension scheme members who are Scottish taxpayers liable to income tax at no more than the Scottish starter rate of 19%, or who pay no tax, current tax rules will continue to apply. This means that scheme administrators will continue to claim relief at 20% in respect of these individuals, and HMRC will not recover the difference between the Scottish starter and Scottish basic rate.
Pension scheme members who are Scottish taxpayers liable to income tax at the Scottish intermediate rate of 21% will be entitled to claim the additional 1% relief due on some or all of their contributions above the 20% tax relief paid to their scheme administrators.
These pension scheme members will be able to claim the additional relief for 2018 to 2019 by contacting HMRC if they don’t already complete Self Assessment returns, or through their return if they do. HMRC will engage with stakeholders to help affected members claim this additional tax relief.
Pension scheme members who are Scottish taxpayers liable to Income Tax at the Scottish higher rate (41%) and Scottish top rate (46%) will be able to claim additional relief on their contributions up to their marginal rate of tax in the usual way, either in their Self Assessment tax return or if they don’t complete a tax return by contacting HMRC.
For other aspects of the Scottish Budget, have a look at our in depth review of the budget.
Similarly if you want to get more information on Pensions & available tax relief, have a look at our recent Blog on that topic.
If you would like to discuss how the Scottish Confirmed Budget for 2018/2019 may effect you or your business, please get in touch!
Until the next time!
Charles Donkers (ACMA), Tulip Thistle Accountancy
* Assumes person is in receipt of the Standard UK Personal Allowance
** Personal Allowance is reduced by £1 for every £2 earned over £100,000
*** Note: An individual’s election of ‘main residence’ for Capital Gains Tax purposes will not determine ‘main place of residence for Scottish taxpayer status purposes.
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