National Insurance – Practical implications for Scotland

The Chartered Institute of Taxation (CIOT) has commented on the practical implications for taxpayers in Scotland following the Prime Minister’s announcement that rates of National Insurance (NI) are to increase by 1.25 per cent from next April.

NI rates will then return to their existing levels from 2023/24 when the temporary increase is replaced by a standalone 1.25 per cent surcharge.

The CIOT also notes that the changes to dividend tax that were announced alongside the proposed NI increase will also apply to Scotland as control over tax on dividends is reserved to the UK Parliament.

Alexander Garden, chair of the CIOT’s Scottish Technical Committee, said:

“The changes to National Insurance announced by the Prime Minister will apply across the UK. This is because powers over NI are not devolved to the Scottish Parliament.

“For higher earners in Scotland who have employment income¹ between the Scottish and UK higher rate thresholds for income tax (currently £43,662 and £50,270), these changes would mean that next year, this portion of their income would be taxed at a marginal rate of 54.25 per cent, compared to 33.25 per cent for people elsewhere in the UK ².

“This is because the upper earnings limit for National Insurance, the point at which the rate of NI paid will fall from 13.25 per cent to 3.25 per cent, is linked to the UK, not Scottish, higher threshold³.

“This anomaly has existed since the Scottish and UK higher rate tax thresholds began to diverge in 2017.

“The changes announced today also mean that anyone with employment income of more than £9,568 per year will be asked to pay more. This is below the level of earnings at which income tax starts to be paid⁴.

“Most employees will pay an extra £37.53 per year more than they would have if the government had decided to fund this package through income tax.

“However, if a person is receiving Universal Credit, then at least initially their benefit should be topped up to compensate for some of the loss of income resulting from the NI increase next year. This is because entitlement to Universal Credit is worked out after income tax and NI deductions are taken into account.

“It will be important to clarify whether the new standalone surcharge will be treated in the same way for Universal Credit purposes so claimants know whether they will continue to get this protection once NI rates revert back to normal.”