Scottish Rate of Income Tax Update

Hazel Gough, Chiene + Tait’s Director of Personal and Business Tax outlines proposed changes to the Scottish Rate of Income Tax in advance of the Scottish Budget on 15th December 2016.

From next April increased income tax powers will transfer to Scotland. The Scottish Parliament will be able to set income tax rates, thresholds and new tax bands. The devolved powers still do not enable Scotland to vary the personal allowance and if this is to be increased above the level set by Westminster, the Scottish Government will need to create a zero rate band in order to achieve this.

The Scottish Rate of income tax (SRIT) came into effect in April as part of the extra powers devolved to Scotland. It is payable, by individuals resident in Scotland, on earned income, pension income and rental income. Savings and dividends continue to be taxed at rates set by Westminster. Currently, SRIT applies equally across the existing 20%, 40% and 45% rates and consequently any increase in the tax rates would fall hardest on those with lower earned income.

That will all change from next year. Earlier, the Scottish Government set out proposals for the use of the additional tax powers. It is understood that there are no plans to increase the top rate of 45% however, the Government has said that it intends to cap the threshold at which the higher rate tax (currently 40%) applies at £43,387 in line with the consumer price index. Philip Hammond announced in his Autumn Statement last month that the higher rate threshold will be increased to £45,000 from 2017. Whether Scottish taxpayers will be better or worse off than those in the rest of the UK will not be known until the Scottish Parliament presents its budget on 15 December.

If you have a question about SRIT, please contact Hazel at hazel.gough@chiene.co.uk or call 0131 558 5800.