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

Scottish income tax divergence likely to create complexity for taxpayers

The decision today (21 February) by the Scottish Parliament to set income tax bands different from 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 tax1, 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.

Commenting, 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.”

ENDS

Notes for editors

1.       From 6 April 2017, the threshold at which taxpayers will be liable to pay the higher rate of income tax will be frozen at £43,000 in Scotland.  Across the rest of the UK, the higher rate threshold will increase to £45,000.

2.       Tax on income generated from savings, such as bank interest, or dividends from share investments, has not been devolved to the Scottish Parliament.  As a result, Scottish taxpayers in receipt of such income will need to calculate their liability using UK income tax rates and thresholds.

3.       Introduced in April 2015, and applicable across the UK, the Marriage Allowance enables couples where one partner earns less than the personal allowance (£11,500 in 2017/18) to transfer 10% (£1,150 in 2017/18) of their personal allowance, reducing the higher earner’s tax liability by up to £230.  To be eligible, the recipient taxpayer must pay income tax only at the basic rate.

4.       The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

Contact: Chris Young, External Relations Officer, 07900 241 584; cyoung@ciot.org.uk