New Scottish Tax Rates | And How They Will Affect You This Year!
Tax Changes will affect everyone in the Scottish Hair & Beauty Industry!
With the Scottish Government setting different tax rates to the rest of the UK for the first time this year, we thought it worth clarifying what it can and what it can’t set regarding tax – and whether as a Scottish Salon Owner or Stylist, you might be worse off, or not.
Part 1 | What it can set
The Scottish Government can set whichever income tax rates and income tax thresholds it thinks appropriate. So for example, this year it has introduced an entirely new 19% ‘Starter Rate’ which does not exist for the rest of the UK.
The Scottish Parliament therefore has the power to tax salaries , self employmentincome, rental income and pensions – which affects all Salon Owners, employed Stylists and Chair Renters alike.
Part 2 | What it cannot set
The Scottish Government cannot however tax savings (for example bank account interest) or dividends received – which both continue to be taxed under UK rates and thresholds.
Neither can it set the personal income tax allowance (currently £11,850), national insurance, corporation tax, capital gains tax or inheritance tax – all of which also remain controlled by the UK Government.
Scottish Income Tax rates last year – 2017/18
In 2017/18 Scottish income tax was the same as the rest of the UK but with one important exception: the higher-rate threshold was frozen at £43,000 (the threshold being £45,000 in the rest of the UK). As a result, Scots who earned more than £45,000last year paid £400 more tax than those who lived in the rest of the UK; and this difference may well increase over the coming years as the UK Government raises thehigher-rate threshold to £50,000 but the Scottish Government doesn’t. One to watch out for.
Scottish Income Tax rates this year – 2018/19
For the first time, Scottish income tax is now quite different to the rest of the UK, with aStarter rate, Intermediate rate, different bands and a 41% Higher rate:
|Bands||Band name||Rates (%)|
|Over £11,850-£13,850||Starter Rate||19|
|Over £13,850-£24,000||Basic Rate||20|
|Over £24,000-£43,430||Intermediate Rate||21|
|Over £43,430-£150,000||Higher Rate||41|
|Above £150,000||Top Rate||46|
So are you better or worse off?
Given the complexity of the different bands and tax rates, it is hard to generalisewhether Scots will be worse off or not in comparison to their counterparts in the rest of the UK – in some cases yes – in other cases no. Each person would need to calculate this with respect to their specific circumstances.
According to Scottish finance minister Derek Mackay, 70% of taxpayers will pay less as a result of the changes, due to the new 19% band. If you earn less than £33,000 in 2018-19, you’ll pay less tax than you did in 2017-18, says the Scottish government but Scots may still be worse off than other UK residents. If you earn more than £26,000, you may end up paying more under the new Scottish tax system than you would in the rest of the UK.
Scottish Salon Owners
Having said that, if a Scottish Salon Owner pays themselves a small tax-free salary (£11,850 or less) and takes the rest of their income as dividends, they will not be affected by the difference in Scottish income tax and will pay the same amount as Salon Owners in the rest of the UK.
However, at higher income levels (for example where a Scottish Salon Owner needs to extract more income from their Salon or has significant rental income from property) they may well end up paying more tax than someone living in another part of the UK. Again, it will come down to the Owner’s specific circumstances and how they plan the most efficient way to pay themselves – which could also include getting their Salon to make pension contributions for them (which we’ll look at in a future Article).
All Salonfrog Clients have our ‘Core Service’ as standard, which includes a personal business tax strategy each year. This considers current and future tax legislation and the income requirements of the Salon Owner to formulate the most effective and efficient way to extract profit from their business. This year, for the first time, our planning also includes where they are resident!