COMMENT: Bob Hair is portfolio director and head of the Edinburgh office of Cazenove Capital
We Scots pride ourselves on our unique culture, character and country. As parodied from Brigadoon to Braveheart, we are known worldwide for our sense of humour and hospitality. But what have we to do with boiling frogs?
Apparently if you put a frog into boiling water, it will jump out, however if you place it in cold water and slowly bring to the boil, the frog will stay because it does not notice the change in heat. The heat is certainly being gradually turned up on our finances. We pay the highest rates of tax in the UK. And it will get worse.
The top tax rate in the UK is still 45 per cent, but in Scotland from next month the top rate will in effect be 52 per cent if you earn £45,000. This is because not only will you start paying 40 per cent tax at £43,000 (instead of £45,000 like the rest of the UK), but you have to pay national insurance at 12 per cent between £43,000 and £45,000. That’s £1,040, or 52 per cent on the top £2,000 of earnings.
And there is more to come – by 2020 the rest of the UK should only be paying higher-rate tax if they earn more than £50,000. In Scotland, it could stay at £43,000 or increase by inflation – at say 2.5 per cent a year the threshold would increase to £46,300. What can we do about it? Here are a few tips to help:
Make sure you are registered correctly – you are only a Scottish tax payer if you live in Scotland.
Check your council tax band – if you find that your home is in the wrong band, you can be reassessed into a lower band and get a partial refund for as far back as 1993.
Don’t move, improve your home. If you have more than one property or are fortunate enough to be in the £250,000+ home ownership bracket, the tax on buying a new home might be a lot more than improving your current home.
Give up part of your salary to increase your pension if you can. If you are earning £45,000 wouldn’t you rather see that top £2,000 in your pension rather than £1,040 of it being taken in tax? “Salary sacrifice” can be used to have your employer pay more into your pension, and the amount given up is not subject to income tax or national insurance.
For the self-employed or business owners, make pension contributions directly from the business to reduce taxable earnings.
Top up your pension privately – you can pay up to £40,000 into your pension in the current tax year and can use up any of that allowance unused for up to three previous years. It won’t save the extra national insurance but it can save tax at 40 per cent, although this annual allowance is reduced for those earning over £150,000.
Keep it in the family – spouses may pay different rates of tax so make sure you are holding savings and investments in the right name.
Use it or lose it – savers have until 5 April to use various allowances like the £15,240 Individual Savings Account allowance which increases to £20,000 on 6 April. Investors should review their holdings to see if they can take capital gains tax-free using the annual allowance of £11,100.
Reclaim overpaid tax – everyone has an additional allowance for savings interest of £1,000 but you may have already paid tax on the interest you have received.
Make charitable donations – using gift aid or payroll giving, you can make a big difference to charities and also save income tax.
Of course, you could just leave. For some people, turning up the heat with all of these tax penalties for living in Scotland just might be the tipping point. After all, we are not frogs.
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