Government to act over military personnel Scottish tax disadvantage

Defence Secretary Gavin Williamson has announced he is looking to counter the Scottish government’s income tax rise that affects thousands of Armed Forces personnel in Scotland, following the introduction of devolved tax rates

The defence secretary’s intervention follows the decision by the Scottish government last month to create new income tax bands and increased tax levels, which will see military personnel in Scotland worse off than the rest of the UK.

Some 1,400 submariners will move to HM Naval Base Clyde by 2020, creating the new single home of the entire UK submarine service. An additional 400 personnel will move to RAF Lossiemouth as it adds a fourth Typhoon squadron and prepares to receive the entire UK fleet of nine submarine hunter Poseidon P-8 Maritime Patrol Aircraft from the early 2020s. Army numbers are also increasing with the return of troops from Germany.

On 21 February 2018, the Scottish Parliament ratified their income tax rates and thresholds applying to Scottish taxpayers. As a result those earning more than £26,000 will pay more tax in comparison to their counterparts in the rest of the UK.

Troops resident in Scotland are liable to pay the Scottish rate of income tax (SRIT) and so are disadvantaged compared to their peers based in the rest of the UK. The defence secretary has reassured servicemen and women that he would look to mitigate against the negative impact of Scottish taxes. Up to 8,000 service personnel are set to be hit by the tax rise.

Commenting earlier this month about the implications of recent moves to devolve responsibility for parts of the tax system, RSM tax consultant Andrew Hubbard said: ‘As the realities of tax devolution start to be apparent we do see UK-wide issues emerging which are likely to create problems if, as seems inevitable, further tax powers are eventually devolved.’

‘The problem comes when this patchwork of different rates has to be accommodated within the UK tax system as a whole.’

Hubbard pointed out that there are also issues with the marriage allowance, which is available to basic rate taxpayers.

‘But now in Scotland there are two other rates - the starter rate (19%) and the intermediate rate (21%). So, individuals in these bands are no longer basic rate taxpayers and therefore would fail the eligibility test for the marriage allowance even though their earnings level would entitle them to the allowance elsewhere in the UK.

‘But the marriage allowance is a UK-wide matter. So, a change to the structure of Scottish income tax meant that individuals north of the border would lose out on a UK-wide benefit, even though the UK government had not changed the eligibility test.

‘Fortunately, this has been sorted out by a last-minute fix confirming that taxpayers within the three lowest tax bands will still receive the allowance, but an amendment to UK tax legislation was needed – which illustrates the problem,’ Hubbard said.

Report by Pat Sweet

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