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How are Scottish Income tax rates changing?

In December 2017, the Scottish Government voted to change tax band rules. A move, which for the first time set different tax rates to the rest of the UK, will see higher and additional rates of tax increased.
 
To make things a little easier to digest, Mike McAnulty, director at Central Investment, outlines the new tax bands, the implications of these changes for pension tax relief and explains how the changes will affect your personal finance.
 
In the 2018/19 Scottish Budget, the Finance Secretary for Scotland announced changes to income tax bands and rates for Scottish resident taxpayers. From the 6th April this year, we will see the introduction of two new tax bands – ‘starter’ and ‘intermediate’ - meaning Scottish taxpayers will pay tax by reference to five incomes bands as opposed to three.
 
The income tax rates, which apply to income such as employment income, self-employed trade and property income, range between 19% and 46%. Scottish taxpayers are entitled to the same personal allowance as individuals in the rest of the UK, which is increasing to £11,850 for 2018-19 (a rise from £11,500 in 2017-18).
 
Under the change the new starter rate, together with the increase in personal allowance, will ensure that those earning less than £33,000 in 2018-19 - which is 70% of all taxpayers – will pay less tax than they did in 2017-18.
 
Those earning between £24,001 and £43,430 will now be part of the new intermediate rate, which will see them pay an extra 1p in taxes for every pound earned.
 
These new rates and bands for 2018/19 are set out below:
 
 
BAND NAME BAND WIDTH £ BAND RATE % PENSION TAX RELIEF %
       
STARTER 11,850 – 13,850 19 20
BASIC  13,851 – 24,000 20 20
INTERMEDIATE  24,001 – 43,430 21 20 + 1
HIGHER  43,431 – 150,000 41 20 + 21
ADDITIONAL/TOP  150,000 + 46 20 + 26
 
 
 
Pension Scheme Members
 
The changes to income tax rates for Scottish taxpayers will see a knock-on effect for members of pension schemes which apply tax relief after they have paid income tax - known as ‘relief at source'.
 
While we at Central Investment believe HMRC has taken the most practical and fair approach, there are implications for members and some will need to take action to order to gain their full entitlement.
 
Pension relief is currently applied to basic rate taxpayers at 20%, so making an £80 contribution to your pension becomes £100. Those moving to the new 19% starter rate will now pay less income tax but will still benefit from 20% tax relief. Those remaining on the basic tax rate of 20% will see no difference.
 
Intermediate rate taxpayers will lose out on 1% through the new bandings, however they will be able to claim tax relief to address this.
 
Higher-rate and additional-rate taxpayers, who currently receive pension relief of 20%, will also be able to claim the additional 1%.
 
For example, if you earn £25,000 a year and pay 5%, or £1,250, into your pension pot each year, the scheme would receive £312.50 direct from HMRC, giving a total pension contribution of £1,532.50. You can then claim an additional 1% tax relief of £15.63.
 
It is fair to say that this does not sound like a lot but over a substantial period of time, this could add up to thousands of pounds.
 
HMRC has made a promise to communicate with individuals on a longer-term approach, and coupled with seeking advice from your financial advisor, this will ensure each individual reaps the benefit from their full entitlement to pensions tax relief.
 

In December 2017, the Scottish Government voted to change tax band rules. A move, which for the first time set different tax rates to the rest of the UK, will see higher and additional rates of tax increased.Mike McAnulty, director at Central Investment, outlines the new tax bands, making things a little easier to digest. 
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