Income Tax and National Insurance thresholds are not equalised despite today’s headline announcement

Income tax and National Insurance (NI) thresholds will not be equalised in 2022/23 following today’s Spring Statement, while the prospect of further income tax divergence between Scotland and the rest of the UK has increased, the Chartered Institute of Taxation (CIOT) has said.

The effective annual threshold for NI in 2022/23 will end up being £11,908 because the increase does not take effect until July.

The NIC announcement will apply across the UK, including Scotland, but because of the differences between Scottish and UK income tax, Scottish taxpayers with income under £27,850 will pay less income tax and NI than their counterparts in the rest of the UK.

The CIOT added that the changes will do nothing to address the anomaly that sees Scottish higher earners paying a marginal rate of 54.25% on income between £43,662 and £50,270.

Following the Chancellor’s announcement of the government’s ambition to lower the UK basic rate of income to 19p from 2024, the CIOT also cautioned that this could lead to further future divergence between the income tax regimes in Scotland and the rest of the UK.

It would also result in no Scottish taxpayers paying less income tax than their counterparts in the rest of the UK.

While the Scottish Government could act to change this, the SNP’s election manifesto in May last year pledged to freeze rates and bands of income tax for the duration of the 2021-26 Scottish Parliament.

On changes to the NI threshold, John Cullinane, CIOT Director of Tax Policy, said:

“The actual National Insurance threshold for 2022/23 will be end up being lower than the income tax personal allowance because the changes don’t take effect until July.

“For the first 13 weeks of the new tax year, National Insurance will be paid at the original earnings threshold of £190 per week. From 6 July, this threshold will increase to £242 per week.

“There are practical reasons why this change can not be made immediately, but it has the effect of reducing the effective NI threshold over the course of the upcoming tax year from £12,570 to £11,908”.

John Cullinane continued:

“Once this year’s changes have been implemented, the impact of the Scottish Government’s 19p starter rate of tax will mean that workers earning less than £27,850 will be up to £21.62 better off compared to someone doing the same job for the same salary elsewhere in the UK.

“However, today’s announcement does nothing to address the anomaly that will see Scots with earnings between £43,662 and £50,270 taxed at a marginal rate of 54.25% on this portion of their income, compared with 33.25% in the rest of the UK.

“This situation has arisen because lower rates of National Insurance are aligned with the UK higher rate threshold of income tax.

“Scottish Ministers are likely to use the upcoming fiscal framework review to suggest that this discrepancy emphasises the need for National Insurance powers to be devolved, but unpicking the existing relationship between income tax and National Insurance is unlikely to provide an overnight solution and will be complicated and time consuming for workers, employees and the tax authorities.”

On the prospect of further income tax divergence between Scotland and the rest of the UK, John Cullinane added:

“It is too early to know what the specific impact would be on Scotland of the Chancellor’s ambition to reduce the basic rate of income tax to 19p because we don’t know how the Scottish Government intends to respond.

“Replicating the Chancellor’s policy would effectively mean widening the 19p starter rate of tax to include all taxpayers earning less than the higher rate threshold and the end of the 21p intermediate rate of tax.

“If Scottish Ministers didn’t follow suit with changes, then the UK changes would mean that no Scottish taxpayers would pay less income tax than their UK counterparts, undermining the Scottish Government position that its income tax policy ensures lower earners pay less tax than other parts of the UK.”