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March 16th 2018

Think the top rate of income tax in Scotland is 46%? Think again!

The Scottish Parliament has passed the Budget Bill for 2018/19, so we can now look forward to five income tax bands from 6 April this year.

For 2018/19 Scottish taxpayers with earned or self employed income will pay rates of 0%, 19% (income between £11,851 and £13,850), 20% (£13,851-£24,000), 21% (£24,001-£43,430), 41% (£43,431-£100,000), 61.5% (£100,001-£123,700), 41% again (£123,701-£150,000), then 46% (over £150,000).

Why the strange 61.5% rate on income above £100k? Because the income tax personal allowance is reduced progressively to £nil on income above that level, turning the actual rate of 41% into an effective rate of 61.5%. Add 2% NIC and we arrive at an effective rate of 63.5%.

To add further complexity, the Scottish rates apply only to earned and self-employed income. So, income from dividends and savings continue to be taxed at the UK rates, rather than the Scottish rates!

We have commented elsewhere about the complexities of pensions tax relief as it will apply to Scottish taxpayers from 6 April. One small slice of good news for those of you contemplating the new, 63.5% rate - with careful planning, those with earned or self employed income above the £100k threshold may be able to benefit from tax relief for pension contributions, potentially avoiding the impact of the 61.5% rate altogether.

Contact us today to discuss how the new rates may affect you.

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