Scottish income tax rates and thresholds for 2023/24 – what do they mean for Scottish taxpayers?
In their budget for 2023-24, the Scottish Government proposed changes to the rates and thresholds for income tax that will apply to the non-savings and non-dividend income of Scottish taxpayers. These changes took effect from 6 April 2023. In this blog Chris Thorpe, CIOT technical officer, takes a look at what these changes mean.
Non-savings and non-dividend income includes income such as employment salary, income from pensions, profits from self-employment and rental profits. In the remainder of this blog, we refer to “earned income” as a convenient shorthand for non-savings and non-dividend income.
Scottish income tax has been divided into five bands since 2018/19. This set the tone for greater divergence between Scottish and UK income tax rates and bands.
Under the five-band structure, the basic rate band has effectively been split into three – the starter (19%), basic (20%) and intermediate rate (21%) bands. The additional rate band was renamed the top rate band, and the higher and top rates were originally each set at one percentage point higher than their UK income tax equivalents, at 41% and 46% respectively.
The divergence between Scotland and the rest of the UK has affected higher and top rate taxpayers in particular1 since 2018/19, and this increases in 2023/24.
Although the top rate threshold falls to £125,140 to match the reduction of the additional rate threshold in the rest of the UK2 to £125,140 south of the border, from 6 April 2023 the Scottish higher and top rates will each increase by 1%, to 42% and 47% respectively.
The rates and bands for the Scottish starter, basic and intermediate rates remain unchanged from 2022/23.
The Scottish rates and bands for income tax from 6 April 2023 are:
| Scottish income tax rates 2023/24 | Scottish income tax bands 2023/24 |
| Scottish starter rate - 19% | £12,571 - £14,732 (£2,162) |
| Scottish basic rate - 20% | £14,733 - £25,688 (£10.956) |
| Scottish intermediate rate - 21% | £25,689 - £43,662 (£17,974) |
| Scottish higher rate - 42% | £43,663 - £125,140 |
| Scottish top rate - 47% | £125,141 and above |
While Scottish taxpayers who have earned income of less than £27,850 in 2023/24 (1.47million people or 52% of Scottish taxpayers) will pay less income tax than taxpayers in the rest of the UK earning the same level of income, this tax reduction is relatively small, at a maximum of around £22 for the year. Scottish taxpayers with earned income of more than £27,850 will pay more income tax than taxpayers in the rest of the UK earning the same level of income3.
A Scottish taxpayer with total income of £50,000 (assuming this is all earned income) will have a tax liability of £9,038 in 2023/24 (personal allowance of £12,570; £2,162 at 19%; £10,956 at 20%; £17,974 at 21%; £6,338 at 42%); meanwhile, a taxpayer subject to the UK rates and bands will have a tax liability of £7,486 (personal allowance of £12,570; £37,430 at 20%). A difference of £1,552; in 2022/23 the difference was £1,489.
A Scottish taxpayer with total income of £100,000 (assuming this is all earned income) will have an income tax liability of £30,038 in 2023/24 (personal allowance of £12,570; £2,162 at 19%; £10,956 at 20%; £17,974 at 21%; £56,338 at 42%); meanwhile, a taxpayer subject to the UK rates and bands will have a tax liability of £27,432 (personal allowance of £12,570; £37,700 at 20%; £49,730 at 40%). This is a difference of £2,606; in 2022/23 it was £2,043.
Further complexities
Scottish and UK Income tax
Since the Scottish rates and thresholds apply to earned income only, a Scottish taxpayer who has both earned income and taxable savings income, such as bank interest, and/or dividend income may have to consider both the UK rates and thresholds and the Scottish rates and thresholds in order to work out their income tax liability. This complexity first arose in 2017/18 when Scottish income tax and UK income tax bands first diverged from one another.
Example
By way of example, a Scottish taxpayer with earned income of £49,000 and dividend income of £2,000 in 2023/24 will have to work out their tax liability as follows:
Their total income is £51,000, but this is reduced to £38,430 by their personal allowance (£51,000 – £12,570). This means they have to pay income tax on £36,430 of their earned income (£49,000 – £12,570), according to the Scottish rates and bands – so at 19% on £2,162, at 20% on £10,956, at 21% on £17,974 and at 42% on £5,338.
They also have the £2,000 of dividends, but they have to assess this against the UK rates and bands, while also taking into account the income that is taxable according to the Scottish rates and bands. Note that the UK basic rate band is £37,700 – the taxable earned income, subject to Scottish income tax, has used up £36,430 of this band, leaving £1,270. Whilst the taxpayer is also entitled to the UK dividend allowance of £1,000 for 2023/24, this also uses up the basic rate band, leaving £270 available. Of the remaining £1,000 of taxable dividend, £270 is therefore taxed at the UK basic dividend rate of 8.75%, with the remaining £730 at the higher rate of 33.75%.
Capital Gains Tax (CGT)
As with dividend and savings income, the rates of CGT depend on the UK rates and thresholds, with the CGT annual exemption of £6,0004 for individuals also applying to the whole of the UK. Therefore, a Scottish taxpayer with both earned income and capital gains will also have to consider both UK and Scottish rates and thresholds.
National Insurance contributions
In addition to income tax, employment income and self-employment profits are generally subject to National Insurance contributions (NIC). These have their own rates and bands, but the Upper Earnings Limit for Class 1 NIC and the Upper Profits Limit for Class 4 NIC are aligned with the higher rate threshold set by the UK Parliament – £50,270 for 2023/24. Likewise, the Primary Threshold for Class 1 and Lower Profit limit for Class 4 are both aligned with the UK personal allowance (£12,570) for 2023/24.
While the alignment of the UK income tax and NIC thresholds means that UK basic rate taxpayers pay a maximum joint effective marginal rate of 32%, Scottish taxpayers with equivalent levels of income can pay a maximum joint effective marginal rate of 53%, (on income between the Scottish higher rate threshold of £43,662 and the UK higher rate threshold of £50,270).
Marriage allowance
The marriage allowance is available to married couples and civil partnerships, where one party has some unused personal allowance in a tax year and the other party does not pay tax at any rate other than those specified in the legislation. Broadly, this means a taxpaying civil partner or spouse of a non-taxpayer is eligible provided they do not pay tax at the higher or top (additional) rates of tax. More detail is available here on the Low Incomes Tax Reform Group (LITRG) website.
If the higher earner is a Scottish taxpayer in 2023/24, and has total taxable income between £43,662 and £50,270, on which they pay Scottish income tax at the higher rate, they are not eligible for the marriage allowance. Whereas, if they paid tax according to the UK rates and thresholds, they would be eligible, as they would only be paying tax at the basic rate.
It is possible to apply for the marriage allowance after the end of the tax year. This means that taxpayers who are not sure whether or not they will be eligible during the tax year may still have the chance to benefit from this relief, once they have established their total income for a particular tax year.
In addition, it may be possible for a Scottish taxpayer in this position to extend their basic rate band by making Gift Aid donations or pension contributions during the relevant tax year. If, as a result of such payments, they do not actually pay any higher rate tax, even though their total income is above £43,662, they would be eligible to be the recipient of the marriage allowance from their non-taxpaying civil partner or spouse.
Pension contributions tax relief and Gift Aid tax relief
Currently, charities do not have to identify whether or not a donor is a Scottish taxpayer – they simply claim tax relief at 20% from HMRC on Gift Aid donations. Scottish taxpayers who pay tax at a rate higher than 20% are able to claim extra tax relief. As always with Gift Aid, it is essential for a taxpayer to have paid enough tax during the tax year to cover the amount of tax relief claimed by the charity.
Scottish taxpayers who make pension contributions under net pay arrangements have their pension contributions deducted from their pay before income tax is applied. This means that they receive tax relief automatically at their marginal rate of tax.
For relief at source pension arrangements, pension providers continue to claim tax relief at 20% for all Scottish taxpayers.
HMRC will not recover the difference between the Scottish starter and Scottish basic rate, where a Scottish taxpayer receives 20% relief but has only paid tax at the starter rate of 19%.
Scottish taxpayers who are liable to income tax at the Scottish intermediate rate of 21% are entitled to claim the additional 1% tax relief due on some or all of their contributions. If they already complete a tax return, they can do this through Self Assessment. Otherwise, they need to contact HMRC.
Scottish taxpayers who are liable to income tax at the Scottish higher rate (42%) and Scottish top rate (47%) are able to claim additional relief on their contributions up to their marginal rate of tax in the usual way, either through Self Assessment or by contacting HMRC.
PAYE tax codes
HMRC have published separate Scottish payroll tax tables for tax years 2016/17 onwards, to deal with the different Scottish higher rate threshold and now the five rates and bands of Scottish income tax. This continues for 2023/24 and should allow the PAYE system to deal with Scottish taxpayers who have typical ‘L-suffix’ tax codes, such as S1257L.
Note that there are additional codes to deal with second employments, for example SBR, SD0, SD1 and SD2, which apply Scottish income tax at the flat rates of 20%, 21%, 42% and 47% respectively.
Points to note
Although the Scottish Parliament has set rates and thresholds for income tax payable by Scottish taxpayers on certain types of income, HMRC continue to collect and administer all income tax. This means that if you have any questions about your income tax, you should continue to contact HMRC.
Scottish taxpayers who have PAYE income should have a Scottish PAYE tax code (a code with an “S” pre-fix).
The LITRG website provides Scottish income tax guidance in its tax basics section.
Scottish taxpayer status is a question of fact. A taxpayer’s home address is not the only factor in determining Scottish taxpayer status, but it will be decisive in many cases. There is guidance on who is a Scottish taxpayer on the LITRG website.
1In 2017/18, the first year that the Scottish Parliament had the power to set rates and bands of income tax, rates and thresholds were set at the same levels as those elsewhere in the UK with the exception of the higher rate threshold, which was set at £43,000 in comparison to £45,000 elsewhere in the UK
2Although Wales has the power to set a Welsh rate of income tax, it has retained parity with the UK income tax regime
3Scottish Income Tax 2023-24: factsheet - gov.scot (www.gov.scot)
4From 6 April 2023. It reduces to £3,000 in April 2024