Since 6 April 2016, income tax payers resident in Scotland (“Scottish taxpayers”) have been paying the Scottish Rate of Income Tax on their non-savings and non-dividend income.1 What this has meant in practice during the 2016/17 tax year, since the Scottish Rate of Income Tax was set at 10%, is that Scottish taxpayers have simply been paying income tax at the same overall rates as taxpayers in the rest of the UK.2 The difference is that part of the overall rate paid has been set by the Scottish Parliament, and the revenues from the Scottish Rate of Income Tax are given to the Scottish Government.
From 6 April 2017, Scottish taxpayers will pay income tax on their non-savings and non-dividend income at rates set entirely by the Scottish Parliament. All of the income tax they pay on such income will be collected by HM Revenue & Customs (HMRC) and then given to the Scottish Government.
We now know that the only difference between the UK and Scottish rates and bands of income tax for 2017/18 will be the higher rate threshold, which will be £43,000 for Scottish income tax and £45,000 for UK income tax, assuming eligibility for the personal allowance of £11,500. So the basic rate band for Scottish income tax will be £31,500, whereas the basic rate band for UK income tax will be £33,500, which could result in Scottish taxpayers earning over £43,000 paying up to £400 more in income tax than taxpayers in the rest of the UK.
Some observers may wonder why only this one minor change in relation to the Scottish Rate of Income Tax and the Scottish income tax rates and thresholds has been made, as on the face of it the devolved powers may seem significant. In fact, however, the devolved income tax powers are in some respects quite limited.
Income tax is only partially devolved under the Scotland Act 2016. Firstly, the Scottish Parliament only has the power to set rates and bands in respect of non-savings and non-dividend income. Scottish taxpayers will continue to pay income tax on their savings income and dividend income according to the rates and bands set by the UK Parliament and that tax will be retained by the UK Government (although Scotland will receive a share of revenues through the block grant). Secondly, only powers to set rates and bands are devolved. Although the rates and bands are perhaps the most visible aspect of income tax, they are in fact a very small part of it. The majority of tax law relating to income tax remains reserved to the UK Parliament, including the determination of the tax base (that is, what is taxable income), tax reliefs, exemptions and allowances. So, decisions about the personal allowance, for example, are reserved to the UK Parliament.
These limitations not only may have helped ensure an initially cautious approach to setting Scottish rates and bands, but they also militate against handing over the administration of Scottish income tax to Revenue Scotland, the Scottish tax authority. So, although the Scottish Parliament has set rates and bands for income tax payable by Scottish taxpayers on non-savings and non-dividend income, HM Revenue & Customs (HMRC) continue to collect and administer all income tax, both UK and Scottish – this is currently the most efficient approach. Otherwise, if Revenue Scotland dealt with income tax on non-savings and non-dividend income, Scottish taxpayers would still need to deal with HMRC in respect of their savings and dividend income.
As noted above, there is only a single point of divergence between the UK and Scottish rates and thresholds. This difference could however, not only result in a greater tax liability of up to £400 for Scottish taxpayers compared to UK taxpayers with the same level of income, but it could also make the income tax position of taxpayers resident in Scotland quite complex, if they have more than one type of income, some of which is subject to Scottish rates and bands, and some of which is subject to UK rates and bands. In such cases, the Scottish taxpayer may have to consider both the UK rates and thresholds and the Scottish rates and thresholds in order to work out their income tax liability. A similar position will arise for Scottish taxpayers with taxable capital gains, since the rates of capital gains tax depend on the UK rates and thresholds.
Other, perhaps less anticipated consequences, may arise. The Marriage Allowance is available to married couples and civil partnerships, where one party has some unused personal allowance in a tax year and the other party does not pay tax at any rate higher than the basic rate.
It would appear, that if the higher earner is a Scottish taxpayer in 2017/18, and has total taxable income between £43,000 and £45,000, on which they pay Scottish income tax at the higher rate, they are not eligible for the Marriage Allowance. Whereas, if they paid tax according to the UK rates and thresholds, they would be eligible, as they would only be paying tax at the basic rate.
So, at first sight, it looks like significant new powers for the Scottish Parliament with only a small change for Scottish taxpayers. In fact, however, the devolved income tax powers may be slightly less significant than is immediately apparent, or at least they face some restrictions, and the small difference in rates and bands will lead to a lot of additional complexity for some Scottish taxpayers.
Joanne Walker is a Technical Officer at the Low Incomes Tax Reform Group and the Chartered Institute of Taxation
1 Non-savings and non-dividend income includes employment income, profits from self-employment, pension income and rental profits.
2 The income tax rates payable by Scottish taxpayers on their non-savings and non-dividend income in 2016/17 are worked out by deducting 10% from each of the UK basic, higher and additional rates, and then adding on the single Scottish Rate of Income Tax set by the Scottish Parliament. Setting the Scottish Rate of Income Tax at 10% means there is no actual change to the overall rates of tax paid.