Tax rates and bands for contractors in Scotland

If you live in Scotland, (or, broadly, more in Scotland than anywhere else) then you will usually be subject to Scottish income tax rates, which are different to the rest of the UK, writes Chris James, head of limited company solutions at Workwell.

HMRC classifying you a Scot

There’s a space to tell HMRC on your personal tax return, and you can tell if HMRC believes you are a Scottish income taxpayer by looking for an ‘S’ on your tax code (e.g. ‘S1257L’ instead of ‘1257L’ which would be typical for a taxpayer outside Scotland). If you think you’ve been wrongly classified, you should speak to your accountant.

Scotland has used its ability to vary income tax in its own territory since 2017.

And ‘income tax’ here generally means non-savings income, so PAYE-type earnings, pensions, personal property income and so on.

Scotland’s tax thresholds and rates, versus the UK’s

The personal tax allowance, or ‘nil rate band’ is not set by Scotland and so is the same across the UK, and its gradual withdrawal when ‘earnings’ pass £100,000 in a tax year works the same way in Scotland too.

Scotland’s tax rates and bands, versus those elsewhere in the UK, are outlined in the tax below.

*Above £100k of ‘income’ the personal tax allowance is gradually reduced to nil.

Slightly lower, slightly more

As the table shows, the overall pattern of income tax in Scotland is that a small number of people benefit from a lower ‘starter rate’ than in the rest of the UK. 

Then, above around £25,000, people pay approximately 1% more income tax than elsewhere, and the higher rate (often known as the ‘40% band’) starts at a lower income level (£43,622) in Scotland, than it does elsewhere (£50,270). 

The total differences in income tax paid are relatively small except where the earlier higher rate band has had an impact, and tax is being paid at 41% where it would have been at 20% outside Scotland (so between £43,662 and £50,270 at present – this difference could be more than £1,000).

Parity, largely

National Insurance, commonly paid alongside income tax, is the same in Scotland as elsewhere. The same applies to Corporation tax and VAT. Dividend tax is also aligned across the UK, as are taxes on savings, which means that its perfectly possible to complete a tax return with both Scottish and UK taxes applied to different elements of income!

For the construction industry scheme (‘CIS’), although an individual worker’s eventual tax bill will include Scottish rates of income tax if applicable, the flat rate 20% (or other rate) deduction made before payments to some CIS workers is the same whether they are subject to Scottish tax or not. In the same way as individual CIS workers elsewhere, any CIS suffered during the tax year is taken into account when calculating the final liability or refund figure.

What about IR35 as a Scottish taxpayer?

Should ‘IR35’ apply (Chapter 8 or 10), then personal taxes will be calculated using the Scottish or non-Scottish tax rates, depending on the residency of the worker who has been assessed carrying out the ‘inside IR35’ assignment. Assuming IR35 does not apply, dividend tax planning will be unaffected by location, as the dividend tax rates and thresholds are the same inside and outside Scotland.

Additionally, for most contractors in Scotland, there is a desire to optimise the amount of income that can be drawn out of the company tax-efficiently,  just as there is in England!

A small salary is normally used, and the size of this is normally less than the personal allowance, and influenced by national insurance thresholds. As these are the same inside and outside Scotland, there are normally no adjustments to make here.

Tax planning; tax bill -- tax advice?

So, potentially reassuring if you’re a London-based contractor looking to relocate and work in Edinburgh, when ‘outside IR35,’ Scottish income tax rates are unlikely to make any difference to tax planning, or your tax bill. ‘Inside IR35’ however, the picture could be quite different, as it would be anywhere else in the UK, so tailored guidance from your accountant – whether they are north of the border or not – would be a must where the off-payroll rules apply.