Scotland Budget introduces five income tax rates


The Scottish Draft Budget announced the introduction of new income tax rates for Scottish taxpayers.

Finance Secretary Derek Mackay delivered the 2018/19 Scottish Draft Budget on Thursday 14 December 2017 setting out the Scottish Government’s financial and tax plans.

A reminder – a Scottish taxpayer

Following devolution of some tax powers and the introduction of separate Scottish income tax bands (and rates) it has been necessary to define and identify a Scottish taxpayer. A Scottish taxpayer is someone who is UK resident for tax purposes and has one place of residence which is in Scotland.

Individuals who have more than one place of residence in the UK need to determine which of these has been their main place of residence for the longest period in a tax year. Individuals who cannot identify a main place of residence will need to count the days they spend in Scotland and elsewhere in the UK. If they spend more days in Scotland, they will be a Scottish taxpayer. Guidance on determining whether an individual is a Scottish resident can be found at www.gov.uk/hmrc-internal-manuals/scottish-taxpayer-technical-guidance/sttg2000

Scottish Income tax

Following devolution the Scottish Government has the power to set the rates and bands of income tax (other than those for savings and dividend income) which apply to Scottish resident taxpayers. Since 6 April 2016 the income tax rates and bands for Scottish taxpayers have been frozen at 20%, 40% and 45% respectively.

2017/18 comparison

For 2017/18 the higher rate threshold in Scotland is £43,000 whilst the threshold in the rest of the UK is £45,000. This means that a Scottish higher rate taxpayer will pay £400 more tax in 2017/18 than a UK higher rate taxpayer, being £2,000 at the marginal rate of 20%.

Rates and bands for 2018/19

In the 2018/19 Draft Budget the Finance Secretary announced two new income tax bands: a starter rate of 19% for the first £2,000 of income above the personal allowance and a 21% intermediate rate for income between £24,000 and the higher rate threshold. In addition, whilst the basic rate will be frozen at 20% the higher and additional (to be renamed ‘top’) rates of tax will increase by 1% to 41% and 46% respectively.

For 2018/19 the rates and tax bands applicable to Scottish taxpayers on non-savings income will be as follows:

Scottish Bands Band name Scottish Rates
Over £11,850* – £13,850 Starter 19%
Over £13,850 – £24,000 Basic 20%
Over £24,000 – £44,273 Intermediate 21%
Over £44,273 – £150,000** Higher 41%
Over £150,000** Top 46%

* assuming the individual is entitled to a full UK personal allowance

** the personal allowance will be reduced if an individual’s adjusted net income is above £100,000. The allowance is reduced by £1 for every £2 of income over £100,000

The UK higher rate tax point for 2018/19 has been set at £46,350 (for those entitled to the full UK personal allowance) and the tax rates for non-savings and non-dividend income have been maintained at 20%, 40% and 45% respectively.

Better or worse off

The introduction of the starter rate of 19% means Scottish taxpayers on low pay will be better off than those in the rest of the UK by £20!

Scottish taxpayers with employment income of £26,000 will pay the same amount of income tax as those with the similar income in the rest of the UK. For higher earners, with pay of £150,000, a Scottish taxpayer will pay an extra £1,770 of income tax than those on similar income in the rest of the UK.

Employers of Scottish taxpayers

Employers should be aware that if an employee is classed as a Scottish taxpayer then a special PAYE code (S) will apply and should be notified to employers and pension providers by HMRC.

An employer does not have to make any assessments on taxpayer status. Employers should not change a tax code unless advised to do so by HMRC. Employers of Scottish taxpayers need to ensure their payroll software has the capability to deal with S codes.

It is important to keep HMRC informed of your correct address details as this information is crucial in determining whether or not you are a Scottish taxpayer. Employees can check and update their address details through their online Personal Tax Account at www.gov.uk/personal-tax-account.

Proposed change to LBTT for First-Time Buyers

Although the announcement of new income tax rates and bands made the headlines, the Draft Budget also included an announcement for first time buyers and Land and Buildings Transaction Tax (LBTT). The Government announced proposals for LBTT relief for first-time buyers of properties up to £175,000. This relief will raise the zero tax threshold for first-time buyers from £145,000 to £175,000, and according to the Scottish Government 80% of first-time buyers in Scotland will pay no LBTT at all. First-time buyers buying a property above £175,000 will also benefit from the relief on the portion of the price below the threshold.

The Scottish Government announced that they will launch a consultation on the policy before introducing the first-time buyer relief in 2018/19. The relief for first-time buyers paying Stamp Duty Land Tax on first homes in the rest of the UK was introduced from 22 November 2017.

Devolution – Land Transaction Tax

With Wales set to introduce Land Transaction Tax in April 2018 and having devolved powers over income tax from April 2019 there are lots of changes to get to grips with. Details of the Welsh proposals can be found at www.gov.wales/funding/fiscal-reform/welsh-taxes/land-transaction-tax

Delay in the abolition of Class 2 NIC


The government has announced that it will introduce legislation, to abolish Class 2 national insurance contributions (NIC) and to make further proposed NIC changes in 2018.

The measures the legislation will implement,  will now take effect one year later than previously announced, from April 2019. These measures include the abolition of Class 2 NIC paid by self employed individuals, reforms to the Class 1A NIC treatment of termination payments (the £30,000 rule) and changes to the NICs treatment of sporting testimonials.

On 2 November 2017 the Government announced a one year delay to the abolition of Class 2 NICs. Class 2 NICs will now be abolished from 6 April 2019 rather than 6 April 2018.

The government have stated that ‘the delay will allow time for the government to engage with interested parties and Parliamentarians with concerns relating to the impact of the abolition of Class 2 NICs on self-employed individuals with low profits’.

Internet links: GOV.UK abolition Class 2 National insurance Bill

Employee gifts – tax free?


At this time of year some employers may wish to make small gifts to their employees.

A tax exemption is available which should give employers certainty that the benefits provided are exempt and do not result in a reportable employee benefit in kind. In order for the benefit to be exempt it must satisfy the following conditions:

  • the cost of providing the benefit does not exceed £50 per employee (or on average when gifts made to multiple employees)
  • the benefit is not cash or a cash voucher
  • the employee is not entitled to the voucher as part of a contractual arrangement (including salary sacrifice)
  • the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties
  • where the employer is a ‘close’ company and the benefit is provided to an individual who is a director, an office holder or a member of their household or their family, then the exemption is capped at a total cost of £300 in a tax year.

If any of these conditions are not met then the benefit will be taxed in the normal way subject to any other exemptions or allowable deductions.

One of the main conditions is that the cost of the benefit does not exceed £50. If the cost is above £50 the full amount is taxable, not just the excess over £50.The cost of providing the benefit to each employee and not the overall cost to the employer determines whether the benefit can be treated as a trivial benefit. So, a benefit costing up to £50 per employee whether provided to one or more employees can be treated as trivial. Where the individual cost for each employee cannot be established, an average could be used. Some HMRC examples consider gifts of turkeys, a bottle of wine or alternative gift voucher.

Further details on how the exemption will work, including family member situations, are contained in HMRC manual.

However if you are unsure please do get in touch before assuming the gift you are about to provide is covered by the exemption.

Internet link: HMRC manual

Delay to roll out of Tax free childcare


The government have announced a delay to the roll out of tax free childcare which was expected to be fully implemented by the end of the year. From 24 November 2017 the service is available to parents whose youngest child is under 6 or who has their 6th birthday on that day. Parents can apply online through the childcare service which can be accessed via the Childcare Choices website.

In April 2017, HMRC started rolling out the childcare service via a single website through which parents can apply for both 30 hours free childcare and Tax-Free Childcare. The roll out started with parents of the youngest children first. HMRC acknowledge that over the summer some parents didn’t receive the intended level of service when using the website and that they have subsequently made significant improvements. For those parents who have had difficulties in accessing the service, compensation may be available: see childcare service compensation.

Over the coming months, HMRC will gradually open the childcare service to parents of older children, whilst continuing to make further improvements to the system. HMRC hope this strategy of managing the volume of applications will result in prompt eligibility responses when parents apply, with ‘almost all parents receiving a response within five working days, and most getting their decision instantly’.

All eligible parents will be able to apply by the end of March 2018. Parents will be able to apply for all their children at the same time, when their youngest child becomes eligible.

Tax-Free Childcare is the new government scheme to help working parents, both employed and self employed, with the cost of childcare. For every £8 a parent pays in, the government will pay in an extra £2. Parents can receive up to £2,000 per child, per year, towards their childcare costs making a total amount of £10,000. Higher limits of £4,000 and £20,000 apply for disabled children.

To qualify for Tax-Free Childcare parents and partners in the household must generally meet a minimum income level of on average £120 a week and each earn less than £100,000 a year.

The scheme will eventually be available for children up to the age of 12, or 17 for children with disabilities. Those eligible will be able to apply for all their children at the same time.

Employer Supported Childcare, usually by way of childcare vouchers, will remain open to new entrants until April 2018 to support the transition between the schemes and it will continue to be available for current members if they wish to remain in it or they can switch to the new scheme. It is not possible to benefit from both Employer Supported Childcare and Tax Free Childcare at the same time.

Internet link: Tax free childcare for under 6

Pension contribution increases and temporary staff


The Pensions Regulator is reminding employers that they need to comply with their auto enrolment duties.

Automatic enrolment still applies to temporary staff this Christmas

With the festive season fast approaching, employers may be planning to take on temporary staff to help their business survive the rush. Automatic enrolment applies to these employees in the same way as permanent employees, even if they will only be working for a short time.

Employers will still need to assess temporary staff and auto enrol any eligible employees into a qualifying pension scheme. Once auto enrolled both the employer and employee must make pension contributions.

It is possible to apply postponement to temporary employees, which has the effect of delaying some of the auto enrolment duties, but TPR are warning this must be dealt with correctly.

Are you ready to increase contributions?

TPR are reminding employers that they need to be ready to deal with the increased auto enrolment pension contributions which apply from April 2018. Employers and their employees need to be aware of how the changes will affect them, including checking that the employer’s payroll software is compatible.

Guidance is included on TPR website on this issue.  From 6 April 2018, the minimum contributions employers and staff pay into their automatic enrolment pension goes up to 2% for employers and 3% for employees. This increase has been planned since automatic enrolment started. Further increases in rates are scheduled for April 2019.

Please contact us if you would like any help with auto enrolment duties.

Internet links: TPR increase in contributions TPR irregular

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