Scottish Tax – tax liability computation

If you earn less than £43,000, then there is nothing for you to worry about here, as your tax liability in Scotland will be unchanged.

Earn more than that, and there are some tweaks you need to be aware of.

As previously mentioned, the Higher Rate threshold now differs between Scotland and the Rest of the UK, and we have detailed this in the comparative computations shown below for someone earning above the Higher Rate threshold.

Tax liability for PAYE

2017/18 Scotland Rest of UK
Income 60,000 60,000
Personal allowance 11,500 11,500
Taxable income 48,500 48,500
First £32,000 @ 10% 3,200 n/a
Scottish rate = £32,000 @ 10% 3,200 n/a
UK Rate £33,500 @ 20% n/a 6,700
Balance at 40% 6,600 6,000
Total tax due 13,000 12,700

This additional liability of £300 is the difference in the Higher Rate threshold at 20% – (£45,000-43,500) * (40%-20%) = £1,500 * 20% = £300.

Tax liability for self-employed

One adjustment that has not been recognised fully is that NI limits remain unchanged and are set by the UK Government.

This means that the computation of Class 4 NI for the self employed – for example – will be the same regardless of where the taxpayer lives.

The tax computation is exactly the same.

Using the above example and following it through to compute Class 4 NI gives the same answer in both cases.

Scotland Rest of UK
Income 60,000 60,000
Lower limit 8,164 8,164
Upper limit – 9% 45,000 45,000
Rate above upper limit 2% 2%
NI to Upper limit 3,315.24 3,315.24
NI above upper limit 300.00 300.00
Total NI 3,615.24 3,615.24

The above demonstrates that if you are a Scottish taxpayer and earn over £45,000 from self-employment you will be facing a marginal 49% tax rate on that slice of earned income between £43,500 and £45,000.
As employees have a Class 1 NI rate of 12%, there will be a marginal tax rate of 52% on that slice of earned income between £43,500 and £45,000.

Marginal rates of tax

This is where it gets strange and contrary to what you would expect.

Income Employed Self-employed
Below £8,164 nil nil
Between £8,164 and £11,500 12% 9%
Between £11,500 and £43,500 32% 29%
Between £43,500 and £45,000 in Scotland 52% 49%
Between £43,500 and £45,000 Rest of UK 32% 29%
Between £45,000 and £150,000 42% 42%
Above £150,000 45% 45%

The effect of the loss of personal allowance for income above £100,000 and the impact of any claw-back of Child Benefit are excluded for simplicity.

Tax liability on dividend income

It has been repeatedly stated that this is the effect on earned income, but in actuality it is all non-savings income that is subject to the above regime. This means that rental income is taxed according to the Scottish tax system is the taxpayer is resident in Scotland.

The impact on savings income is unchanged as this has to be taxed at the UK rates. This means that dividend and interest income will be subject to the dividend allowance of £2,000 and the savings allowance of £1,000 (reduced to £500 for Higher Rate taxpayers).

Now you need to contact us for more information.