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Scottish workers to pay more income tax than the rest of the UK after mini-Budget

scotland houses income tax
scotland houses income tax

Scottish workers earning more than £14,732 are to pay more income tax than in the rest of the UK as the gap between families north of the border grows starker.

The changes to income tax announced at the mini-Budget do not apply to devolved nations Scotland or Wales, and so Scots cannot benefit from the cut to the basic rate, which has been brought forward, or the abolition of the 45pc rate. The change to National Insurance, slashing the planned 1.25pc rise, applies across the whole of the country.

It means that Scots paid the average annual salary will be around £200 worse off than people on the same wage elsewhere in the UK, according to Liz Smith, the Scottish Conservative finance spokesman.

Sean Cockburn, of the Chartered Institute of Taxation, said: “Bringing the reduction to the UK basic rate forward by a year means that, as things stand, from next year, Scottish ministers will be unable to say that some Scots face lower tax bills compared to the rest of the UK.”

Scotland has its own income tax bands and rates. Steven Cameron, pensions director at Aegon, said: “In Scotland, higher rate income tax is paid on earnings over £43,662 rather than the higher £50,270 in England and at a rate of 41pc rather than 40pc. Currently, it’s only those in Scotland earning under £14,732 who pay less income tax, as there’s a starter rate of 19pc.”

Higher earners

It is higher earners who will suffer the most from the asymmetrical tax arrangements. They face a huge divergence in what they owe depending on where they live, with some threatening to leave for lower taxes in England.

Mr Cameron said: “The difference increases with earnings and will be particularly severe for those earning above £150,000. High-earning Scots could be paying 46pc income tax, much more than the 40pc that will be paid by their English counterparts. Many employers operate across the UK, and such disparities will raise real issues.”

Scots earning £200,000 will pay £85,648 in tax a year, including income tax and National Insurance, compared to the £79,602 that will be paid by an equivalent earner in England, according to calculations by Aegon. This is a difference of £6,046.

Those on £500,000 north of the border will pay £229,648 in tax a year, which is £24,046 more than the £205,602 that will be paid in income tax by an English taxpayer from April 2023, when the 45pc tax band is abolished.

Mr Cameron added that, due to the pension tax relief top-up at their highest marginal rate of income tax, “Scotland could be the part of the UK you want to be in when paying pension contributions”.

Stamp duty

It is not just personal taxes which will hit Scots far harder. Changes to stamp duty south of the border will also widen the gap between taxpayers in Scotland and England. While property prices are lower north of the border, the tax payable on the same value home is far higher.

In Scotland, the nil-rate threshold of the Land and Buildings Transaction Tax (LBTT), its version of stamp duty, applies only on the first £145,000 of a property’s value. This is far lower than the new level of £250,000 in England and Northern Ireland, up from £125,000.

After that threshold, Scottish buyers pay 2pc of the purchase price between £145,001 and £250,000, after which point the levy rises to 5pc, with more bands above that.

This creates a huge difference in transaction tax payable in the two nations. The average home in Scotland, costing £182,000, would incur a LBTT bill of £739, according to the Chartered Institute of Taxation. But in England this same-priced property would be exempt from stamp duty under the changes made to the threshold by the chancellor at the mini-Budget.

An average home in England, costing £292,118, would attract a stamp duty bill of £2,105. This would rise to £4,205 of LBTT in Scotland for the same-priced property.

A £500,000 home sold to a home mover and not as an additional property would incur tax of £23,350 in Scotland and £12,500 in England, taking into account the saving of £2,500 after the mini-Budget.

First-time buyers also face a shortfall: the relief in Scotland applies to properties worth up to  £175,000; the maximum reduction is £600. But in England and Northern Ireland, the new nil-rate threshold for first-timers is £425,000, with tax relief available for properties worth up to £650,000.

Landlords must also pay more in Scotland with an Additional Dwelling Supplement of 4pc, compared to the 3pc in England.

Liz Smith, the Scottish Tories' Shadow Finance Secretary, said the cut in stamp duty called for SNP ministers to "follow suit" by raising the LBTT threshold to £250,000. Scotland followed England’s lead when Westminster brought in the stamp duty holiday in 2020.