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Scottish Budget 2018: will you need to pay more income tax next year?

Income tax thresholds set to rise with inflation in 2019-20

Scottish Budget 2018: will you need to pay more income tax next year?

Income tax thresholds in Scotland will rise with inflation next year, under proposals announced in today’s Scottish Budget.

This follows last year’s overhaul of the income tax system, which meant anyone earning more than £24,001 would pay more income tax than elsewhere in the UK.

Finance secretary Derek Mackay announced the changes today, but they’ll need to be approved by the Scottish Parliament before coming into force in April next year.

Which? explains the proposed Scottish tax rates for 2019-20, and offers advice on whether you might need to pay more in income tax.

Scottish income tax rates 2019-20

The table below shows the proposed new rates of income tax, compared to this year’s rates.

In today’s Budget speech, the thresholds for the starter rate, basic rate and intermediate rate were lifted. The UK personal allowance also rose, as per the Autumn Budget 2018 held in late October.

  Tax year 2018-19 Tax year 2019-20
Tax band Income Tax rate Income Tax rate
Personal allowance £0-£11,850 0% £0-£12,500 0%
Starter rate £11,851-£13,850 19% £12,501-£14,549 19%
Basic rate £13,851-£24,000 20% £14,549-£24,944 20%
Intermediate rate £24,001-£44,273 21% £24,944-£44,430 21%
Higher rate £44,274-£150,000 41% £44,430-£150,000 41%
Top rate £150,000+ 46% £150,000+ 46%

Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 they earn over the threshold, meaning that anyone who earns more than £125,000 will pay tax on all income they earn.

Scottish income tax calculator 2019-20

You can use our calculator to work out how much income tax you’ll pay in 2019-20 or in previous tax years.

What do the income tax changes mean for you?

The introduction of an additional income tax band in last year’s Scottish Budget effectively meant that lower earners paid less tax, while higher earners paid more.

Today’s Budget means those with lower salaries can essentially earn more money in 2019-20 before having to pay the lower or intermediate rates of tax.

For instance, if you earn £14,000 a year, the increased thresholds mean you’ll only pay 19% income tax next year – whereas you would previously have been paying 20%.

Overall, this means that in Scotland you’d pay £285 income tax per year, compared with £300 elsewhere in the UK.

Taxpayers could be tipped into a higher band

However, while no increases have been announced for those on higher incomes, thousands of people could be tipped into a higher tax band as a result of salary increases.

For instance, if you earn £44,000, just a 2% pay increase would tip part of your salary into the higher rate band, regardless of the fact that your pay has only increased modestly.

That’s because anything you earn over £44,430 will be taxed at 41% rather than 21%.

In this instance, you’d be paying significantly more tax than if you were on the same salary elsewhere in the UK.

So, if your pay increase results in your salary increasing to £44,880, in Scotland you’d pay £6,944.80 in income tax per year. In the rest of the UK, you’d still be a basic-rate taxpayer and would only pay £6,476.

What must happen for the changes to take place?

If the SNP’s draft Budget proposals are approved, they’ll come into force from April 2019.

As the SNP is a minority party, it needs the support of at least one other party to be able to pass the Budget – but there are tensions between the major parties.

  • Last week, talks stalled between the SNP and Lib Dems. The BBC reported that the Lib Dems pulled out of discussions when the SNP refused to ‘take independence off the table’. The Lib Dems are also pushing for investment in mental health, local government budgets and teachers’ pay.
  • The Conservatives have also said that the SNP would have to rule out a second independence referendum in order to gain its support, as well as measure to address the ‘widening tax gap’ between the UK and Scotland.
  • Labour wants a Women’s Health Fund to be created, the end of spending reductions for local councils, plus extra money for Child Benefit, Discretionary Housing Payments and a community policing fund.
  • The Scottish Greens have backed the SNP’s Budget for the past two years, and are still seen as the most likely party to back this year’s plans. They are however demanding that a ‘meaningful’ commitment to reforming council tax must be demonstrated first.

Who pays income tax?

If you live in Scotland, you’ll pay income tax on money you earn – be it from employment, self-employment, pensions or other forms of income such as renting out a property.

Your taxable income is the amount you earn above the personal tax-free allowance. In Scotland and the rest of the UK, this is £11,850 for the 2018-19 tax year, but will rise to £12,500 in 2019-20.

You may also be charged income tax on certain fringe benefits you receive as an employee, for things like a company car or private health insurance.

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