The Scottish Budget - a small price to pay for being Scottish?

The Scottish Budget was announced on 15 December 2016.  In the past this would simply set out the Scottish Government’s spending plans, therefore, have very little impact in relation to taxation.

However, as a result of announcements within the Scottish Budget, Scottish taxpayers could, for the first time, see an increase in their personal tax liabilities.

I do not intend to give a full analysis of the Scottish Budget but I would like to highlight the tax implications for Scottish taxpayers.

Scottish Taxpayers

Over the past year individuals were asked to consider whether they were Scottish or not (for tax purposes anyway) and since April 2016 individuals will have noticed their tax codes changing to include an ‘S’ within their code.

The reason for this is since 6 April 2016 the Scottish Parliament have had the power to raise, or lower, the rate of income tax paid by Scottish taxpayers.  This Scottish Rate of Income Tax (SRIT) will only apply to income from employment, self employment, pensions and rental income; however, to date they have not used this power.

However, from 6 April 2017 the Scottish Parliament is able to control the higher rate threshold (the rate at which individuals will be tax at 32.5% or 40% depending on their income).  It was therefore announced that the Scottish Parliament would not increase the higher rate tax threshold to the UK amount of £45,000 but instead increase it to £43,430 in order to fall in line with inflation.

As a result of this, Scottish taxpayers could pay £314 more income tax each year as demonstrated in my example below:

Dividend Tax

As mentioned above, the SRIT will only apply to income from employment, self employment, pensions and rental income.  As a result, the Scottish Government could not change the rate of dividend tax which is currently set at 7.5% for basic rate taxpayers and 32.5% for higher rate taxpayers.

However, by electing to alter the basic rate tax bands the Scottish taxpayers will pay higher rate tax earlier on dividend income.  As the difference between basic rate and higher rate tax on dividends is 25% individuals that receive dividend income could see themselves paying even more income tax as detailed in my example below:

The above changes may be relatively small, however, if we look forward to 2020-21 the UK Government announced that the higher rate threshold would increase to £50,000.  As the higher rate threshold for Scottish Taxpayers is set to fall in line with inflation it is difficult to determine with any degree of certainty what this may be.  However, if we assume a similar increase over the next three tax years the Scottish higher rate threshold will only be expected to rise to £45,000.

As a result of these changes Scottish taxpayers could pay additional tax of between £1,000 and £1,250 per annum, based on identical income to their counterparts elsewhere in the UK.

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