A product of devolution is a complex tax position for certain taxpayers who are resident in Scotland (Scottish taxpayers). Welsh taxpayers are saved complexity as the Welsh government has set its income tax thresholds and rates to mirror those in the rest of the UK.
The Parliament in Westminster sets the rates and bands for NIC, capital gains, savings and dividend income, while the Scottish Parliament sets the rates and bands for everything else. The combination of two different tax bands leads to some very odd marginal tax rates, and challenging tax computations for Scottish taxpayers with an unusual mix of income sources.
For example, an employee in Scotland will face following marginal rates in 2021/22:
| Income in band £ | Scottish tax % | UK Wide NIC | Combined tax & NIC on brand |
|---|---|---|---|
| 0 – 9,568 | 0 | 0 | 0 |
| 9,568 – 12,570 | 0 | 12 | 12 |
| 12,571 – 14,667 | 19 | 12 | 31 |
| 14,668 – 25,296 | 19 | 12 | 31 |
| 25,297 – 43,662 | 21 | 12 | 33 |
| 43,663 – 50,270 | 41 | 12 | 53 |
| 50,271 – 100,000 | 41 | 2 | 43 |
| 100,001 – 125,140 | 61.5 | 2 | 63.5 |
| 125,141 – 150,000 | 41 | 2 | 43 |
| Over – 150,000 | 46 | 2 | 48 |
You need to advise Scottish clients how they could avoid the 53% marginal rate between £43,663 and £50,270. The later figure is expected to be the higher rate threshold in the rest of the UK: £37,700 + personal allowance: £12,570.
The personal allowance for 2021/22 was revealed in the Autumn Spending review as an increase in line with the September CPI figure of 0.5%. The 63.5% marginal rate is a result of the tapering away of the personal allowance above £100,000. That threshold could be changed in the UK Budget on 3 March 2021.
Where clients have annual income hovering around £50,000, and the family is in receipt of child benefit, there is a risk of falling foul of the high income child benefit charge (HICBC). This was designed to claw back child benefit from families where the highest earner pays tax at 40% or more, but the HICBC threshold will fall within the basic rate band in the rest of the UK from 6 April 2021.
The HICBC threshold could be changed in the UK Budget on 3 March, or even abolished!
Written by the Tax Advice Network