Tax professionals issue warning as new tax system takes effect

More than two-thirds of taxpayers will pay less on their current income this year under Scotland’s new tax bands which take effect from today, but tax professionals have cautioned Scottish taxpayers will also be exposed to more complexity and potential confusion than ever before.

The Scottish Government also says the changes to the Higher and Top rate tax bands mean an additional £428 million will be available in 2018/19 to invest in vital public services and the economy.

Under the new system, low earning taxpayers are protected through the introduction of a new Starter Rate of tax.

The income tax system will also be more progressive, raising additional revenue through the introduction of a new Intermediate Rate of 21 per cent and increases to the Higher and Top Rates, to 41 per cent and 46 per cent.

As a result of the changes, and the increase in the personal allowance, all taxpayers earning up to £33,000 – 70 per cent of all taxpayers - will be protected from any increase. Those earning more than £33,000 will pay only a proportionate amount more.

A majority of taxpayers (55 per cent) in Scotland will pay less income tax in 2018-19 than they would in the rest of the UK, while those who can afford to pay more will make a marginally higher contribution to support public services and investment in the economy.

Finance Secretary Derek Mackay said: “The new income tax rates and bands will make the system more progressive and deliver additional revenues to invest in public services and the economy.

“This progressive approach to reforming income tax will not only protect the lowest earning taxpayers, but ensure 70 per cent of Scottish taxpayers pay less tax this year than last year for a given income, while the majority of Scottish taxpayers will pay less than if they lived elsewhere in the UK.

“These measures, combined with our investment in the NHS, the economy, infrastructure, education and essential public services, ensure Scotland will be the fairest taxed part of the UK and provide the best deal for taxpayers.”

However, the Chartered Institute of Taxation (CIOT) said the start of the new tax year brought with it a number of challenges for Scottish taxpayers that will include grappling with as many as five new rates and bands of income tax and ensuring that they continue to receive the correct amount of pension tax relief.

In addition, the Institute highlighted the continuing anomaly that will result in some middle-income earners paying a higher marginal rate of tax and National Insurance (NI) than those on higher incomes.

Moira Kelly, Chair of the Chartered Institute of Taxation’s Scottish Technical Committee, said: “Today is the day that taxpayers across Scotland will really start to notice the impact of tax devolution on their pay packets as a result of the introduction of new rates and bands of Scottish income tax2.

“By introducing a new 19p starter rate and a new 21p intermediate rate – as well as increasing the higher and top rates of tax – every Scottish taxpayer who gets their income from a salary, a pension, renting a home or profits from self-employment will now be exposed to as many as five different rates and bands of tax.

“Complexity was always going to be the price to pay for having control over parts of the income tax regime. While the differences next year may not be huge, they are noticeable and they expose Scottish taxpayers to increasing levels of complexity and potential confusion than ever before.

“It has never been more important for Scottish taxpayers within the PAYE system to make sure that their tax code starts with an ‘S’. This means that HMRC has identified them as a Scottish taxpayer and should prevent any unwelcome surprises – such as finding out that they have paid too little tax – further down the road.

“Scottish taxpayers should continue to be eligible to receive Marriage Allowance worth up to £238 a year where applicable3 but for those paying into their pension under ‘relief at source’ arrangements, they may be entitled to extra tax relief if they pay income tax at a rate higher than the basic rate. They can get this either by phoning HMRC to ensure that this is included in their tax code or by completing a self-assessment tax return at the end of the year.

“The misalignment between devolved income tax and UK-wide National Insurance will also result in the anomaly of some middle-income earners paying a higher marginal rate of tax and NI – equivalent to 53% of their income – than some on higher incomes.

“Things get even more complicated for Scots who also get savings or dividend income. They now face the prospect of having to check both the UK and Scottish rates and bands of income tax to work out what they owe.

“The nature of our tax system already makes it very difficult for the public to understand what they pay and when they pay even before these extra complexities came into effect. It is a timely reminder of the need to move the debate on the devolved taxes away from simply working out what we will pay and when we pay it, but also to consider how these choices interact with the wider UK tax regime.”