‘Scottish income tax divergence likely to create complexity for taxpayers’

Yesterday’s decision by the Scottish Parliament to set income tax bands differently to the rest of the UK is likely to result in increased complexity for some Scottish taxpayers, the body representing the country’s tax professionals has warned.

Although the only difference from the rest of the UK in 2017/18 will be the point at which taxpayers in Scotland start to pay the higher rate of tax, the Chartered Institute of Taxation (CIOT) said that this single point of divergence was likely to result in a more complicated tax system for some thanks to its interaction with the wider UK tax system.

In particular, the Institute said that Scottish taxpayers who receive income from personal savings or dividends2, as well as some of those who currently benefit from Marriage Allowance3, could expect to be affected.

Moira Kelly, chair of the CIOT’s Scottish Technical Committee, said: “Ever since the finance secretary outlined his draft budget to Parliament in December, it has been expected that the Scottish Parliament would vote to agree on an income tax structure different from the rest of the UK.

“In this respect, it has simply been a matter of waiting to see just how significant that divergence would be.

“While the main headline from today’s vote will be that higher earners in Scotland will now be paying up to £400 a year more in tax than their colleagues in the rest of the UK, the increased complexity that will result from the interaction of the Scottish and wider UK tax systems also deserves attention.

“In particular, there will be some Scottish taxpayers who will pay the higher Scottish income tax rate on their earned income, but who will also have to consider the UK rates and thresholds for working out their income tax liability on savings income such as bank interest or share dividends.

“Additionally, taxpayers across the rest of the UK earning between £43,000 and £45,000 will continue to benefit from the Marriage Allowance on account of being basic rate taxpayers while those earning the same amount in Scotland would forfeit this on account of now being classed as higher rate taxpayers.

“Tax devolution is complicated and this year’s decisions represent the first of what could be many divergences in the years to come. It is important that all of those affected understand what the changes mean for them to ensure that they are aware of (and comply) with their new tax obligations.”