The Scottish government’s formal confirmation that all income tax rates will be frozen next year, with the higher rate threshold unchanged at £43,000, means over 300,000 Scottish top rate taxpayers will pay more than their counterparts south of the border
In England, the higher rate 40% income tax threshold is due to rise to £45,000. Under devolved powers, Scotland is able to vary the rates of Scottish income tax (SRIT) by up to 10% from those set by the government in Whitehall.
The revised higher rate threshold, which will not now increase in line with the UK plans, forms part of an agreement with the Scottish Green party that secures the passage of the Scottish budget and local government settlement.
Derek MacKay, Scottish finance secretary, said: ‘Having considered the proposals put to me, I confirm that I will lodge a Scottish Rate Resolution that sets the same tax rates as originally proposed but which applies a cash freeze on the higher rate threshold.
‘This change protects basic rate taxpayers while generating an additional £29m of revenues in 2017/18. And it ensures that 99% of taxpayers on the same income this financial year will not be paying any more income tax in the next financial year’.
‘These proposals balance the need to raise additional revenues, whilst asking the highest earners to forego a significant tax cut at a time of UK government austerity. For the 10% of people covered by this higher rate the income foregone amounts to around £7.70 a week.’
John Preshaw, director, tax dispute resolution, PwC Scotland, said the change would impact approximately 372,000 people in Scotland, who will pay around £400 a year extra.
‘This is an increase on what had previously been considered. Originally, the Scottish government planned to increase the higher rate threshold in line with inflation and that would have cost each taxpayer £314 per annum,’ Preshaw said.
Elaine McInroy, partner and tax specialist at Saffery Champness, said that if the Scottish government continued current policies, the impact on higher rate taxpayers would increase significantly.
‘By 2021-22, when the rest of the UK will have a 40% threshold of £51,000, it is expected that the Scottish 40% threshold will only be £46,917, leading to an expected increased tax burden of £817 for the 372,000 Scottish higher rate taxpayer.
‘The Scottish equivalent of UK stamp duty, LBBT, also means that the Scots are bearing a bigger burden of property tax than their counterparts over the border,’ she said.
The move to freeze the 40% threshold has been criticised by the Federation of Small Businesses (FSB).
Colin Borland, the FSB’s head of devolved nations, said: ‘Our instinct is always to simplify the tax system wherever we can, not complicate it. And we haven’t properly explored the full practical consequences of Scottish divergence from the rest of the UK. So we would have preferred to keep both rates and thresholds aligned.
‘At a time when weak consumer demand and the sluggish state of the domestic economy are dominating small business owners’ worries, it would have made sense to put some money into their customers’ pockets.’
Scottish Income Tax proposed rates and bands 2017-18
Scottish income tax rates | Scottish Bands |
Scottish Basic rate 20% | Over £11,500* - £43,000 |
Scottish Higher rate 40% | Over £43,000 - £150,000 |
Scottish Additional Rate 45% | Over £150,000 and above**- |
* Assumes you are in receipt of the Standard UK Personal Allowance
** Personal Allowance reduced by £1 for every £2 earned over £100,000
