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Tony Wickenden: What advisers need to know about new tax rules for Scotland and Wales

Tony WickendenUntil recently, UK taxation has remained uncomplicated by any major differences in the rules between the countries that make it up.

That is until 6 April, when Scotland brings in its own income tax rates, with Wales following suit a year later.

Wales will also bring in its own land transaction tax, to replace stamp duty land tax, on 1 April. Scotland has had its own land tax – the land and building transaction tax – since April 2015.

Wales: land transaction tax

The LTT will be collected by the Welsh Revenue Authority. As a result, anyone planning to purchase land or property in Wales on or after 1 April will need to check with their advisers about the tax arrangements.

The LTT rate is computed on the same banding approach as SDLT: that is, by how much consideration falls into each band. The Welsh scales for residential properties are shown in table one:

Table one: Welsh land transaction tax bands

Price band Tax rate
£0 – £180,000 0%
£180,001 – £250,000 3.5%
£250,001 – £400,000 5%
£400,001 – £750,000 7.5%
£750,001 – £1,500,000 10%
Over £1,500,000 12%

As with SDLT in England, there is a 3 per cent surcharge on the purchase of additional residential properties. HM Revenue & Customs has issued guidance on Welsh transactions falling either side of 1 April.

Wales: income tax

From April 2019, the UK government will reduce each of the three income tax rates – basic, higher and additional – paid by Welsh taxpayers by 10p.

The National Assembly for Wales will then decide the three Welsh rates of income tax, which will be added to the reduced UK rates.

The combination of reduced UK rates plus the Welsh rates will determine the overall rate of income tax paid by Welsh taxpayers. This is similar to the system introduced for Scotland.

If the National Assembly sets each of the Welsh rates of income tax at 10p, this will mean the rates of income tax paid by Welsh taxpayers will continue to be the same as those paid by English and Northern Irish taxpayers.

Of course, the National Assembly may decide to set different rates to reflect Wales’ unique social and economic circumstances. We will have to wait and see. Either way, taxpayers will not need to do anything as long as HMRC has their correct address.

Scotland: income tax

So, what about Scotland? The move by the Scottish government in its December 2017 Budget to create five tiers of income tax hit an obstacle in the form of resistance from the Green Party. But a compromise was reached and, on 20 February, Holyrood confirmed the new tax structure.

As a reminder, Scottish income tax bands for 2018/19 as set out in table two.

Table two: Scottish income tax bands

Taxable income Band name Tax rate
£0 – £2,000 Starter 19%
£2,001 – £12,150 Basic 20%
£12,151 – £31,580 Intermediate 21%
£31,581 – £150,000 Higher 41%
Over £150,000 Top 46%

Note the following:

  • These rates apply to non-dividend, non-savings income only.
  • UK ex-Scotland rates apply to dividend and savings income.
  • UK ex-Scotland tax bands apply for capital gains tax.
  • Scotland does not set National Insurance contribution rates or limits, so there is now a £2,920 gap (£46,350 – £43,430) between the UK-wide upper earnings/profits limit (set in line with the UK ex-Scotland higher rate threshold) and the starting point for Scottish higher rate tax. The result is a marginal rate in that band for Scottish residents of up to 53 per cent (41 per cent + 12 per cent).

One fascinating problem to have emerged is the transferable tax allowance for married couples and civil partners. Section 55B(2)(b) of the Income Tax Act 2007 makes it a requirement for eligibility that “the individual is not, for the tax year, liable to tax at a rate other than the basic rate… the Scottish basic rate, the dividend ordinary rate…”.

While Scotland kept a 20 per cent basic rate (which solves some relief at source issues), it has slotted in a 21 per cent intermediate rate above, starting at £12,151 of taxable income.

How a Scottish intermediate taxpayer (rates set in Scotland) will be able to claim the transferable allowance (allowances set UK-wide) is furrowing a few brows in Holyrood and Westminster, according to recent press reports.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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