(UK) Scottish Income Tax: Six Bands and a Different Answer

Income tax on non-savings, non-dividend income is devolved to the Scottish Parliament. Scottish taxpayers, identified by where they live rather than where they work, face a rate schedule set at Holyrood.

What is not devolved is the personal allowance, National Insurance, and the taxation of savings and dividend income. The result is a hybrid that produces marginal rates found nowhere else in the United Kingdom.

The Scottish structure

• Six bands rather than the three used in the rest of the UK, including a starter rate below the basic rate and an intermediate rate above it.
• A lower higher rate threshold. Scottish taxpayers reach the higher rate at a lower income than taxpayers elsewhere in the UK.
• Higher rates at the top, including an advanced rate and a top rate above the UK equivalents.
• The personal allowance is identical, because it is reserved to Westminster, including the taper above 100,000 pounds.

Where the crossover falls

The crossover point, where a Scottish taxpayer starts paying more than an equivalent taxpayer elsewhere in the UK, sits a little above the average full-time salary. Below it the difference is a modest saving. Above it the difference grows steadily.

The National Insurance interaction

Here is where it becomes genuinely peculiar. The National Insurance upper earnings limit is set by Westminster and aligned with the UK higher rate threshold, not the Scottish one.

A Scottish taxpayer earning between the Scottish higher rate threshold and the UK one therefore pays 42% income tax and 8% National Insurance at the same time, for a combined marginal deduction of 50%. Above the UK threshold, National Insurance drops to 2% and the combined figure falls back to 44%.

This produces a band in which the marginal deduction is higher than it is on income immediately above it, which is an unintended consequence of two parliaments setting adjacent thresholds independently. The UK National Insurance structure is described in National Insurance thresholds.

Who counts as a Scottish taxpayer

Residence, not workplace. If your main place of residence is in Scotland for most of the tax year, you are a Scottish taxpayer, and HMRC applies an S prefix to your tax code.

1. Someone living in Scotland and working in England is a Scottish taxpayer.
2. Someone living in England and working in Scotland is not.
3. Someone with homes in both is assessed on where they spent most of the year.
4. The S prefix on the tax code is the thing to check, because an incorrect code applies the wrong rates all year. See what your UK tax code means.

What is not affected

Savings interest, dividends and capital gains are taxed at UK rates for everyone. Pension tax relief is given at the Scottish marginal rate for Scottish taxpayers, which makes pension contributions slightly more valuable in Scotland at higher incomes, partially offsetting the higher rates.

Wales has the power to vary income tax rates but has so far set them at the same level as England and Northern Ireland, so a Welsh taxpayer's position is currently identical.