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Scottish budget – income tax changes and what they mean for you

What you need to know about the latest Scottish income tax changes and what they mean for you?

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Deputy First Minister of Scotland and Finance Secretary Shona Robison delivered the Scottish government’s 2024/25 budget yesterday.

Tax was the main talking point as we saw a string of new changes proposed, designed to help address the £1.5bn funding shortfall.

Here are the main income tax changes and what they could mean for you and your finances.

This article isn’t personal advice. ISA, pension, and tax rules can change, and any benefits depend on your personal circumstances. If you’re not sure if something is right you, seek advice.

What’s changing? – the key tax takeaways

  • New ‘advanced’ income tax band introduced, set at 45% for earnings between £75,000 - £125,140

  • Top rate taxpayers to absorb 1% hike from 47% to 48% on earnings above £125,140

  • No changes to starter, basic, intermediate and higher income tax rates

  • Starter and basic rate band thresholds to rise in line with inflation

  • Thresholds for the higher and top rates of tax have been frozen

What could these changes mean for you?

It’s estimated that over a third of Scottish adults won’t be impacted by these new tax changes. And over half of Scottish taxpayers will carry on paying less income tax in the 2024-25 tax year than if they lived elsewhere in the UK.

Instead, ‘those with the broadest shoulders are (being) asked to contribute a little more.’

That means only taxpayers earning significantly above median taxpayer income in Scotland (£28,200) will pay more income tax in 2024-25.

So, what could this look like?

Around 154,000 people, the highest earning 5% of Scottish taxpayers, will have to fork out up to £1,881 more in tax, thanks to the new 45% advanced rate band.

Scottish taxpayers who earn £50,000 will pay £1,542 a year more than they would if they lived in another part of the UK. And any Scottish taxpayers earning £150,000 will pay £6,000 more.

Proposed Scottish income tax rates and bands

Band

Rate

Band

Rate

Starter

£12,571* - £14,732

19%

£12,571* - £14,876

19%

Basic

£14,733 - £25,688

20%

£14,877 - £26,561

20%

Intermediate

£25,689 - £43,662

21%

£26,562 - £43,662

21%

Higher

£43,663 - £125,140**

42%

£43,663 - £75,000

42%

Advanced

N/A

N/A

£75,001 - £125,140**

45%

Top

Above £125,140

47%

Above £125,140

48%

Assumes individuals are in receipt of the standard personal allowance.

**Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over £100,000.

Source: Scottish Budget 2024-25, Scottish Government, www.gov.scot, 19/12/2023.

How could you cut your tax bill?

If you’re set to pay more tax in 2024-25 following these proposed changes, it’s worth thinking about ways to help make sure you don’t pay more tax than you need to.

Here are three ways that could help.

1

ISAs

The government offers the chance to shelter up to £20,000 from UK income and capital gains tax each tax year in ISAs in the form of your ISA allowance.

It doesn’t just shelter you from tax right now, but also shelters you from more tightening that might be in store in the next few years.

If you‘re aged 39 or under, you can also open a Lifetime ISA (LISA). In a LISA you can use up to £4,000 of your ISA allowance per tax year and receive a 25% bonus from the government (up to £1,000).

You can withdraw money from your LISA to buy your first home or after you turn 60 tax-free. You can access the money at other times if you need to but this comes with a 25% withdrawal charge so you could get back less than you put in. Be aware, savings outside a pension (like in a LISA) could affect your entitlement to means-tested state benefits.

2

Pensions

Most people under 75, can make personal pension contributions of up to £60,000 and benefit from basic-rate tax relief (even if you pay tax at a rate below basic rate). If you pay tax at a higher rate, you can claim back any higher rates of relief via your tax return.

Tax relief on personal contributions is limited by your earnings (or £3,600, if this is greater) and you have to pay sufficient tax at the higher rates to benefit from that relief.

This also means that when these new changes kick in, you could get more tax relief from money you add to a pension.

Once you reach the age where you can access your pension (currently 55, increasing to 57 from 2028), you can usually take up to 25% from your pension tax free.

In some pension schemes, you can sacrifice part of your salary and exchange it for a pension contribution – so you save both tax and National Insurance.

3

Spouse exemptions

You might have already used your allowances, but have additional income producing assets or assets with capital gains.

If you have, they can generally be passed between spouses (or civil partners) without triggering a tax bill.

That means, both individuals can make use of their respective allowances and potentially reduce their total tax bill.

Not sure what the Scottish tax changes mean for you?

If you need help or support understanding how the proposed Scottish tax changes impact you, or what you can do about it, a financial adviser could help.

They can review any existing financial plans you have in place, or create a new one unique to your circumstances, to help you prepare for a better future.

Talk to our advisory helpdesk to find out what benefit you might see from taking advice, our advice charges and which of our advice services might suit you best. If you decide to go ahead they'll put you in touch with an adviser.

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Written by
Matt Taylor
Matthew Taylor
Editor

Matthew is the Content Editor and strategist within HL's Editorial team and is responsible for our market leading Investment Times magazine, as well as articles and regular topical feature pages. He first joined HL in 2017, starting out on the Investment Helpdesk before then becoming a Senior within the Investment Helpdesk.

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Article history
Published: 20th December 2023