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Published on 19 August 2024

Do you understand how Scottish income tax works?

News

A recent poll suggests a lot of adults in the UK do not understand how income tax works. It is important to know how income tax works, as it might affect decisions you make in relation to work or your finances. In this article we try to demystify Scottish income tax and how different rates apply to your income, making use of examples and a new graphic.

A blue sheet of paper with a tear in the middle, through the tear the words 'INCOME TAX' can be seen in red text.
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Misunderstanding Scottish income tax rates and bands

According to a recent poll, many people think that once their income hits a higher tax rate band, all their income is taxed at that higher rate – but this is not the case! You can see the results of the poll on the Tax Policy Associates website.

Read on to learn how income tax rates and bands work for taxpayers who are resident in Scotland. If you live in England, Northern Ireland or Wales, please see our accompanying article for UK taxpayers.

How Scottish income tax rates and bands work

The Scottish income tax system tries to ensure that as income increases, the rate of tax increases. This means that people with higher incomes pay a higher rate of tax on their extra income. This is known as a progressive system of income tax. There are some exceptions to this general rule, but we will not be looking at them in this article. For simplicity, the figures also look at Scottish income tax only and do not include National Insurance contributions (NIC). Although NICs are payable on earned income, they are calculated separately from income tax.

Scottish income tax bands – slices of the pie

Scottish income tax rates are calculated based on income bands. It might be helpful to think of these income bands as slices of a pie!

Let’s imagine that all the income you earn in a year is a pie. You have to give a slice of that pie to HMRC as Scottish income tax. The size of the slice you give to HMRC depends on how big your pie is.

Most people in the UK (including Scotland) are entitled to a tax-free personal allowance. You can think of your personal allowance as the first slice of your income pie. You do not pay any tax on your taxable income that falls within the personal allowance. If your total income is less than your personal allowance, then your whole pie is free of income tax.

  • If your pie is bigger than £12,570, but no more than £14,876, then some of your income falls into a different slice, called the starter rate band. The Scottish starter rate band is £2,306. You usually pay Scottish income tax at 19% on income that falls within this slice of your pie.
  • If your pie is bigger than £14,876, but no more than £26,561, then some of your income falls into the next slice, called the basic rate band. The Scottish basic rate band is £11,685. You usually pay Scottish income tax at 20% on income that falls within this slice of your pie.
  • If your pie is bigger than £26,561, but no more than £43,662, then some of your income falls into the next slice, called the intermediate rate band. The Scottish intermediate rate band is £17,101. You usually pay Scottish income tax at 21% on income that falls within this slice of your pie.
  • If your pie is bigger than £43,662, but no more than £75,000, then some of your income falls into the next slice, called the higher rate band. The Scottish higher rate band is £31,338. You usually pay Scottish income tax at 42% on income that falls within this slice of your pie.
  • If your pie is bigger than £75,000, but no more than £125,140, then some of your income falls into the next slice. This slice is called the advanced rate band. You usually pay Scottish income tax at 45% on income that falls within this slice of your pie.

  You do not pay tax at your highest rate of tax on all your income. You only pay your highest rate on the portion of your income that falls within your highest rate band.

You can see the rates and bands of Scottish income tax on our web page Tax and NIC rates and bands.

So, let’s look at an example and see what that means in practice.

Example: Scottish income tax rates and tax bands

Rebecca lives in Scotland and earns £55,000 in the tax year 2024/25. She has no other income. Let’s see what her tax liability is.

She is entitled to the personal allowance of £12,570. So, she pays no tax at all on £12,570 of her earnings.

The starter rate band for Scottish income tax is £2,306. So, Rebecca pays Scottish starter rate income tax at 19% on £2,306 of her earnings. This comes to £438.14.

The basic rate band for Scottish income tax is £11,685. So, Rebecca pays Scottish basic rate income tax at 20% on £11,685 of her earnings. This comes to £2,337.

The intermediate rate band for Scottish income tax is £17,101. So, Rebecca pays Scottish intermediate rate income tax at 21% on £17,101 of her earnings. This comes to £3,591.21.

The remaining £11,338 (55,000 – 12,570 – 2,306 – 11,685 – 17,101) of her income falls into the Scottish higher rate band. Rebecca has to pay 42% Scottish higher rate income tax on £11,338 of her earnings. This comes to £4,761.96.

This means her Scottish income tax comes to a total of £11,128.31 (438.14 + 2,337 + 3,591.21 + 4,761.96).

Although the highest rate of tax that Rebecca pays is 42%, we can see that she has not paid Scottish income tax at 42% on all her income. If she had paid higher rate tax on all of her income, that would have been 42% of £55,000, which is £23,100 – a much higher bill! Overall, Rebecca has paid an income tax rate of approximately 20% across her income. (Her total tax divided by her total income).

In the graphic below, the solid colours show slices of income that Rebecca keeps. The striped colours show slices of income that Rebecca pays to HMRC as Scottish income tax.

Income pie showing Personal allowance, Starter rate band, Starter rate tax, Basic rate band, Basic rate tax, Intermediate rate band, Intermediate rate tax, Higher rate band, Higher rate tax on a coloured pie chart as described in the example.
LITRG creation

Marginal tax rates

You may come across the term marginal tax rate.

The marginal tax rate is the amount of additional tax you pay on every additional pound of income. It is often the same tax rate as the rate of tax for the highest tax band into which your income falls. However, because of quirks in the UK tax system, this may not always be the case. For example, if you pay the high income child benefit charge (HICBC), your marginal tax rate may be higher than the rate of tax for your highest tax band.

Example: marginal tax rate

Siobhan lives in Scotland and earns £51,000 in the 2024/25 tax year.

Her highest rate of income tax is 42%, because she has taxable income that exceeds £43,662, the higher rate tax threshold for Scottish income tax.

If Siobhan’s salary increases by £1, she will have to pay an additional 42 pence in Scottish income tax. Siobhan’s marginal tax rate is 42%.

Note that this means her gross salary will increase to £51,001. Her tax liability will only increase by 42 pence. So, Siobhan’s net income after UK income tax will increase by 58 pence.

Why it matters

It is important to understand how tax rates and bands work, as this may affect some of the decisions you make.

For example, if you think that the higher tax rate will apply to all your income once you fall into that band, you may turn down opportunities, such as:

  • a promotion at work
  • overtime hours
  • a second job
  • offers of work if you are self-employed

If you understand correctly that it is only the part of your income that falls into the higher band that is taxed at that rate, then you can make informed decisions about taking on extra work or accepting a promotion.

Example: extra hours at work

Marco lives in Scotland and is a Scottish taxpayer. In 2024/25 his salary is £38,000. This means Marco is a Scottish intermediate rate taxpayer. The Scottish intermediate rate is 21%. His employer offers Marco a promotion, which means he will have more responsibility. If he accepts the promotion, his salary will increase to £45,000. The Scottish income tax higher rate threshold is £43,662. Marco realises that if he accepts the promotion, he will be a Scottish higher rate taxpayer. The Scottish higher rate is 42%.

Marco incorrectly thinks that he is currently paying the Scottish intermediate rate of 21% on all his earnings. So, he thinks that if he takes the promotion, all his income will be taxed at the Scottish higher rate of 42%, and he will be worse off overall.

Thankfully, he discusses the position with his friend, who is a Chartered Tax Adviser. Marco’s friend explains that Marco is currently paying Scottish income tax at the starter, basic and intermediate rates, as well as benefiting from the personal allowance. He also explains that Marco will only pay 42% income tax on the amount of his income that falls within the higher rate band. That means he will only pay 42% income tax on £1,338 of his income.

So, while Marco’s gross salary would increase by £7,000 because of the promotion, his tax liability on his earnings would increase by £1,750.98 [(5,662 x 21%) plus (1,338 x 42%)]. This would mean that overall, as a result of the promotion, his net pay after income tax would increase by £5,249.02.

Marco is able to make the decision about the promotion based on whether he wants the extra responsibility, rather than being put-off because he thinks he will be worse off financially.

Joanne Walker
Technical officer

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