13 May 2024
Daniel Hough, financial planner at wealth manager RBC Brewin Dolphin
It’s almost become customary with each year that goes by that Scotland’s tax system diverges further from the rest of the UK. Much has been made of the complexity this introduces and the effect it may have on Scotland’s competitiveness as a destination for people to live and work – so it is worth reminding ourselves of what has actually changed.
From April, following the announcements made in December 2023’s Budget, we saw the introduction of a new tax band – the ‘advanced’ rate – and a further increase to the top rate, adding to the range of existing differences. Taxpayers with earnings of between £75,001 and £125,140 pay 45% on this portion of their income, while anything higher will be taxed at 48% compared to 45% elsewhere in the UK.
However, even if these headline changes don’t affect you, you may find yourself paying more tax. The freezing of the ‘higher’ 43% tax rate threshold at £43,662 means that many people fortunate enough to see their pay increase in the past 12 months may find themselves paying a new rate – a process called ‘fiscal drag’. This threshold is lower than the rest of the UK, where you only start paying the higher rate of 40% at £50,271.
Between these changes and frozen thresholds, it means more people in Scotland now pay more tax than other parts of the UK. According to the Chartered Institute of Taxation, anyone earning more than £27,850 will pay more income tax in Scotland than someone earning the same amount in other parts of the country[1].
With these changes, you might think that the highest tax rate you can pay is 48% – but the complications of the tax system mean the effective rate of tax for some people could actually be much higher. At the most extreme end, anyone with earnings between £100,000 and £125,140 could find themselves paying 67.5% on this portion of their income. This is caused by their tax-free personal allowance being tapered by £1 for every £2 that their adjusted net income exceeds £100,000 and is zero if their income is above £125,140.
While the changes won’t affect everyone to the same degree, it is still worth keeping an eye on. You may not be paying a 67.5% tax rate on a slice of your income, but if you are earning £75,000 or above and, therefore, fall within the new ‘advanced’ rate, you may find you are paying substantially more tax than you were last year.
One of the most straightforward ways to reduce that additional tax burden is to pay more into your pension. If, for example, you earn £110,000 and make a gross contribution of £10,000, your adjusted net income would fall to £100,000.
Doing this would reinstate your full personal allowance and provide an effective rate of tax relief of 67.5% on your pension contribution, reducing your tax burden by £3,050 while also boosting your pension pot for the long term through the power of compounded returns. For someone on £80,000, reducing their take-home pay to £75,000 by making extra pension contributions worth £5,000 could save £2,650. Anyone who finds themselves nudged into the higher rate may also want to look at doing something similar.
However, there are a couple of things to bear in mind. Firstly, make sure you have enough income to cover your monthly outgoings and enough cash to hand to cover at least six months’ worth of expenses. There is also a cap on the amount you and your employer can pay into your pension each year and still receive tax relief. For most people, the pension annual allowance is 100% of your UK relevant earnings or £60,000, whichever is lower.
Given the fluid political situation, there may well be further changes ahead for the tax system in Scotland. So, before you make any decisions, it’s more important than ever to speak to a professional financial adviser who can guide you through the steps you can take to ensure you are in as strong a financial position possible in the here and now, while saving for the future too.
– ENDS –
Disclaimers
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office; 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876.
| Scottish tax bands: | ||
| Band | Taxable Income | Tax Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Starter Rate | £12,571 to £14,876 | 19% |
| Basic Rate | £14,877 to £26,561 | 20% |
| Intermediate Rate | £26,562 to £43,662 | 21% |
| Higher Rate | £43,663 to £75,000 | 42% |
| Advanced Rate | £75,001 to £125,140 | 45% |
| Top Rate | Above £125,140 | 48% |
PRESS INFORMATION
For further information, please contact:
Peter McFarlane peter.mcfarlane@framecreates.co.uk / 07412 739 093
Sian Robertson sian.robertson@brewin.co.uk / Tel: +44 (0) 20 3201 3026
NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £51.8* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 31st October 2023.
About RBC
Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.
We are proud to support a broad range of community initiatives through donations, community investments and employee volunteer activities. See how at rbc.com/community-social-impact.