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Where Taxpayers and Advisers Meet
Scottish Budget
18/12/2017, by Lee Sharpe, Tax Articles - Budgets and Autumn Statements
Rating: 2.5/5 from 13 people

Headline-grabbing changes to Income Tax – how do they stand up? TwebEd takes a gambol through the, er, thistles.

The Scottish Draft Budget for 2018/19 has been published. It is an impressive 210 pages long.

The main items of interest from a mainstream tax perspective were

  • Income Tax
  • Land and Buildings Transaction Tax (LBTT)

Income Tax

There were several different approaches originally on offer, but it seems the Scottish government has settled on introducing a couple of new bands and a new rate. For me as a tax adviser, this is 2 new bands and a new rate too many. I am just grateful that Holyrood cannot tinker with the Personal Allowance or savings income.

The spreadsheety part of my brain, slowly recuperating from the Near-Death-Experience that continues to be HMRC’s laughable (you have to) mis-handling of the introduction of the new Dividend and Savings “Allowances”, could not cope with the fresh trauma, so I am distracting it with pivot tables, arrays and macros, while writing.

This is what I have managed to come up with so far:

Income above   Rate Name (ScotTax) Percentage (ScotTax)   Rate Name (RestofUK) Percentage (Rest of UK)
-     Nil     -    Nil
    11,850    Starter        19.00%    Basic         20.00% 
    13,850    Basic        20.00%    Basic         20.00% 
    24,000    Intermediate        21.00%    Basic         20.00% 
    44,273    Higher        41.00%    Basic         20.00% 
    46,350    (Higher - rest of UK)        41.00%    Higher         40.00% 
  150,000    Top         46.00%    Additional          45.00% 

Just How Bad is it, Doc?

If some of the papers are to be believed, this is end-of-world-is-nigh stuff for the Scots (or, more accurately, those who live there). I have done a reasonably fetching little chart to show the reality, which you can download here: 

The table at the foot of the chart is reproduced below:

Earnings ScotTax Rest of UK Tax Excess of ScotTax over Rest of UK: 2018/19
      -         -         -    -  
       5,000        -        -    -  
    10,000        -          -     -  
    15,000        610.00        630.00   (20.00)
    20,000     1,610.00     1,630.00  (20.00)
    25,000     2,620.00     2,630.00  (10.00)
    30,000     3,670.00     3,630.00                        40.00 
    35,000     4,720.00     4,630.00                        90.00 
    40,000     5,770.00     5,630.00                     140.00 
    45,000     6,965.40     6,630.00                     335.40 
    50,000     9,015.40     8,360.00                     655.40 
    55,000   11,065.40   10,360.00                     705.40 
    60,000   13,115.40   12,360.00                     755.40 
    65,000   15,165.40   14,360.00                     805.40 
    70,000   17,215.40   16,360.00                     855.40 
    75,000   19,265.40   18,360.00                     905.40 
    80,000   21,315.40   20,360.00                     955.40 
    85,000   23,365.40   22,360.00                  1,005.40 
    90,000   25,415.40   24,360.00                  1,055.40 
    95,000   27,465.40   26,360.00                  1,105.40 
  100,000   29,515.40   28,360.00                  1,155.40 


I have left off the surplus over £100,000 since the damage is mostly done but fancy that it will be ever-so-slightly more painful for the Scots, since the marginal rate will climb to 61.5% as the Personal Allowance dissipates over £100,000, compared to just 60% for the rest of the UK.

Starter Rate

A meaningless waste of everyone’s time, applying a 1% reduction for incomes between £11,850 and £13,850 and therefore a maximum of £20. The same effect could have been achieved by starting the Intermediate Band at £26,000 rather than £24,000. It does mean that it’s slightly better off to be Scottish, if you earn from £11,850 up to £26,000 (by which time the £20 has been fully clawed back).

I am guessing this is more a declaration of intent, than anything else.

Intermediate Rate

The extra 1% applied from £24,000 opens up a rather modest margin between Scotland and the UK: by the time income reaches the Scottish Higher Rate (£44,273 – rounding is clearly verboten north of The Wall) Scottish taxpayers are paying an extra £182.73, or 0.4% of their gross income.

But now comes the fun bit.

Higher Rate Threshold

Where it will really hurt to be Scottish is between the advent of the Scottish Higher Rate threshold and the rest of the UK’s: £44,273 plays £46,350.

In this less-than-golden-band of a mere £2,077 precisely, Scots are paying tax at 41% while the rest of us are paying tax at just 20%. For those with one eye on the graph, this is the bit where it really starts to head for the stratosphere. By the time we get to the top of that band, at £46,350, “being Scottish” will have cost an extra £620.

That seems an awfully large differential, for such a small band of income.

To put it another way, earnings between £44,273 and £46,350 costs almost as much in extra Scottish tax as the next £53,650 (up to £100,000 - costs a further £536.50). That makes no sense. 

It is worth noting that – since Scotland basically has no say in NICs matters – Scots will still be paying 12% primary Class 1 deductions on their earnings as well, so a full marginal rate of 53% - or 62%, if you’re also paying off Student Loans. That seems a little harsh.

Simply, Primary Class 1 NICs settle back down to 2% once past the Higher Rate threshold, so there is then only a 1% differential.


The Starter Rate is basically meaningless, and will achieve nothing unless and until it falls significantly below the standard Basic Rate. (Or the applicable band is widened. Or the Intermediate Rate is hiked and the Basic Rate band shrunk.)

Where the margin is 1%, it is not making a huge difference to take-home pay until incomes really start to rise.

The margin between the Scottish Higher Rate and everyone else’s is frankly bonkers. But even then, are people really going to move out of Scotland to save £600 a year? Perhaps it will have an effect where people work close to the border, but it may be more down to psychology than cold maths.

What to Do?

I cannot see a mass exodus of people from Scotland for the sake of a few hundred pounds, given the income levels involved. I can see that it could affect house prices near the border, or someone deciding whether to work in Scotland or elsewhere in the UK, where things are otherwise balanced.

For those Scots who are facing a Higher Rate early, in that particularly nasty £44,273 - £46,350 bracket, there are options similar to those for anyone about to break into the 40% bracket, just earlier, such as:

  • Government-approved salary sacrifice (such as still remain) for example childcare vouchers, while they are still available
  • Personal pension payments – from a tax-efficiency perspective, at least, although I am no financial adviser
  • Charitable donations under Gift Aid
  • Where feasible, transferring income-producing assets, etc., to the spouse or civil partner (ordinary savings and investment income does not get taxed at higher rates until tripping over the higher rest-of-UK Higher Rate Band, of course)
As for agents, I predicted a car crash in HMRC's 2016/17 tax calculation; if anything, 2017/18 promises to be worse with the Scottish rate changes we've already had. All joking aside, the idea that, after these further changes, HMRC can be relied on to work out a Scottish person's tax position correctly if they have anything more than earned income... I think I'll go back to doing my bit for Scotland's number 1 export. I suspect a few more agents will be joining me, before long.

Land and Building Transactions Tax (LBTT)

LBTT continues to creep away from SDLT, this time with a slight difference in approach to First-Time Buyers Relief: an increase in the 0% tax threshold from £145,000 to £175,000, which apparently means that 80% of first-time buyers in Scotland will pay no LBTT at all. Holyrood doesn’t care about poor first-time buyers in London, so they don’t have to faff around with additional bands and forfeiture above £500,000: the saving applies as it stands, with no forfeiture or clawbacks.

I think I’d rather the LBTT policymakers had drafted the Scottish Income Tax rules, but it’s not down to me.

About The Author

Lee is TaxationWeb's Articles & News Editor and writes for TaxationWeb. He is a Chartered Tax Adviser with experience of advising individuals and owner-managed businesses over a broad spectrum of tax matters.
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