A Butterfly and the Scottish Thistle

The country that offered couples the excitement of eloping to Gretna Green looks set to give its own residents a smaller tax advantage from married bliss.

It is just six weeks before Scotland complexifies its income tax system with four extra rates and three new thresholds — something so complicated, I've set it all out in a table below. Yet the Westminster and Scottish governments are still trying to work out a way of ensuring that the marriage allowance tax break can still be claimed by eligible Scottish taxpayers.

In the rest of the UK, the marriage allowance is worth £238 for the higher earning spouse (including civil partners) from April. If the lower-earning spouse earns too little to pay income tax — below the personal allowance of £11,850 for the next tax year — they can transfer one-tenth of their allowance to their spouse so he or she can benefit from it. In 2018/19 that is rounded up to £1,190, meaning basic rate taxpayers can recoup 20 per cent of that amount, namely £238.

However, the law says the marriage allowance cannot be claimed if either spouse is “liable to tax at a rate other than the basic rate”. Currently that only excludes couples where one spouse pays higher or additional rate tax. But from April, those words would exclude any Scottish taxpayer with an income between £11,850 and £13,850, who will pay the new 19 per cent “starter rate”, or between £24,000 and £43,430 where a new 21 per cent “intermediate rate” applies.

The official line from both sides of the border is: “The UK government intends to make sure that all Scottish taxpayers who are eligible for the marriage allowance will continue to benefit. The Scottish government is working with HMRC to ensure that this happens.”

Regular readers of this column will know that I love to get my teeth into anomalies in the tax system, but this one is as hard on the molars as Highland Toffee. I am told that teams of civil servants are “poised” to act when the Scottish Parliament passes its Scottish Rate Resolution, due on February 20.

Whatever they do, it seems inevitable that the marriage allowance will be a less valuable tax break in Scotland. From April, the lowest Scottish tax rate will be 19 per cent. The £1,190 transferred would mean a gain to a Scottish taxpayer of 19 per cent of that amount, namely £226.10. That is £11.90 less than the amount saved by those living in the rest of the UK.

Furthermore, the allowance will not be paid to those where one spouse has an income above £43,430 where the new Scottish higher rate tax will begin. Yet for the rest of the UK, this threshold moves up to £46,350 from April.

As for my charge of complexifying, here is a puzzler for you. Which number comes next in this sequence: 0, 12, 31, 32, 33?

How the new Scottish tax rates compare to the rest of the UK
NameBand of earningsTax rate Marginal rate (income tax + NICs)
Starter rate (Scotland)£11,850 - £13,85019%31%
Basic rate (Scotland) £13,850 - £24,00020%32%
Basic rate (rest of UK) £11,850 - £46,35020%32%
Intermediate rate (Scotland)£24,000 - £43,43021%33%
Higher rate (Scotland)£43,430 - £46,35041%53%
Higher rate (Scotland) £46,350 - £100,00041%43%
Higher rate (rest of UK) £46,350 - £100,00040%42%
Top rate (Scotland) £150,000+46%48%
Additional rate (rest of UK)£150,000+45%47%
Source: Paul Lewis

These are the percentage marginal rates of income tax plus national insurance that will apply to Scottish taxpayers from April as earnings rise (31 per cent is for those on the starter rate, then 32 per cent on the basic rate, and 33 per cent on the intermediate rate).

The next number in the sequence is 53. Yes, a 53 per cent marginal tax rate — where the state keeps more of your hard-earned cash than you do — will cover nearly £3,000 of income from £43,430 to £46,350. Every extra pound earned by a Scottish taxpayer in that modest band will be divided 47p to them, 53p to the state.

This means they will pay a higher marginal rate on that slice of income than people on £1m a year who earn an extra pound. This high marginal rate comes about because Westminster still sets the rates for national insurance contributions. In 2018-19, the rate falls from 12 per cent to 2 per cent at the Westminster-set higher-rate tax threshold of £46,350. That leaves these Scottish taxpayers paying the Scottish higher rate of income tax of 41 per cent, plus the 12 per cent rate of national insurance contributions.

An existing cliff edge in the tax system for higher earners is also somewhat steeper north of the border. Scots earning just over £100,000 will pay a higher marginal rate than those in the rest of the UK. They will lose 63.5 per cent in tax and NI from every pound earned between £100,000 and £123,700 as their personal allowance is tapered away to zero, compared with 62 per cent in the rest of the UK.

For those lucky enough to earn more than £150,000, the marginal rate (tax plus NI) is 48 per cent in Scotland, but 47 per cent for the rest of the UK.

The new Scottish income tax rates and bands do not apply to investment or savings income. So people with some income from those sources face more complexity, though generally lower tax bills.

There is more geographical complexity ahead. From April 2019, the Welsh government will get its own right to set tax rates, although it won’t be able to tinker with tax thresholds (yet). One nation, three systems.

I do wonder if the extra tax these measures will raise will be enough to cover the associated costs of extra tax inspectors and officials needed to crunch the various systems together — not to mention the supply of cold towels they will need to wrap around their heads while doing so.

Paul Lewis presents ‘Money Box’ on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney

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