The Scottish budget - how much more?
With much press coverage about who pays more due to the Scottish budget, the ICAS tax team analyse the additional taxes payable by Scottish taxpayers.
What are the key differences between UK and Scottish income tax? One is the comparison between the Scottish higher rate threshold at £43,430 with the higher rate threshold in the rest of the UK at £50,000. The other is the interaction between the income tax higher rate thresholds and the NIC upper threshold.
However, care needs to be taken in making comparisons. And these can be presented in a confusing manner that results in a lack of transparency and understanding.
The comparisons can include:
- For 2019/20 comparing a Scottish income taxpayer and a ‘rest of UK’ income taxpayer – is a Scottish taxpayer better off than their neighbours?
- 2018/19 and 2019/20 comparing a Scottish income taxpayer’s circumstances from one year to the next – will a Scottish taxpayer be better off in 2019/20 compared to last year?
- A comparison that looks at income tax only, or one that takes into account both income tax and NIC. For some, income tax and NIC are both payroll deductions and the important matter is the final take-home pay; for others, NIC is a social security contribution and nothing to do with tax. To complicate this, key elements of income tax (the rates and thresholds) are devolved but NIC is reserved.
Within comparisons between Scottish taxpayers and those in the rest of UK in 2019/20, the difference in tax payable will be largely due to the revised 5-band structure with the one percentage point extra that was added to the higher and top rates last year, and maintained in this budget, and the freezing of the higher rate threshold.
Within comparisons for Scottish taxpayers from one year to the next, reductions in income tax payable come from a mixture of UK-wide measures (mainly due to the personal allowance) and Scottish measures (the setting of rates and bands, notably the higher rate threshold).
National Insurance
There are two related NIC matters, which need a joint Scottish/UK approach to bring transparency and to address them. First, is the increase in NIC for any UK taxpayer as a result of the UK budget on 29 October. The UK higher rate threshold for income tax has gone up to £50,000, and the UK NIC upper threshold mirrors this. However, whilst the UK basic rate band for 2019/20 has widened by £3,000, the employee’s NIC 12% band, which applies across the whole of the UK including Scotland, has widened by £3,442. On earnings up to £50,000 less income tax is collected, whilst more NIC is payable.
Second, a further anomaly arises in Scotland due to the interaction (or lack of it) between the UK-wide NIC upper threshold of £50,000 and the devolved higher rate threshold for SIT. Scottish taxpayers with income between £43,430 and £50,000 will pay a combined marginal rate of 53% (41% SIT and 12% employee’s NIC). This was already a concern in 2018/19, but this budget is widening the 53% band in 2019/20.
For a ‘rest of UK’ taxpayer in 2019/20 with an income of £50,000 their position compared with 2018/19 will be a net increase in their take-home pay of £520. This is made up of reduced income tax of £860 but £340 more national insurance.
For a Scottish taxpayer in 2019/20 with an income of £50,000 their position compared with 2018/19 will be a net reduction in take-home pay of £200 made up of reduced income tax of £140 but an extra amount payable of £340 NIC.
It remains to be seen how much the Scottish budget measures cost in overall terms if the proposed measures lead to Scotland being viewed as tax expensive or to behavioural changes amongst affected taxpayers. It also remains to be seen whether calls to align NIC and income tax continue or whether there will be moves to separate their presentation with Scottish income tax aligned with devolved responsibilities and NIC with reserved pensions and benefits.