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29 May 2018

Do Scottish small businesses face taxing times?

Opening their payslips in recent weeks, Scottish taxpayers might have been pleasantly surprised or quietly disappointed by what they found.

Scotland now sets its own bands and rates of income tax and changes agreed by the Scottish Parliament came into effect in April. 

Instead of the previous three bands of income tax (basic, higher and additional), Scotland now has five bands – with a ‘starter’ band introduced for low earners and a new ‘intermediate’ band for above-average earners.  coins-finance-savings

According to the accountancy body ICAS, these changes mean that a higher band taxpayer in Scotland earning £47,000, will now pay £794 more per year in Scotland than elsewhere in the UK, while a low earner may pay less tax.

The impact of change on Scotland’s small business owners is a little less straightforward.

Ahead of the Scottish Government’s budget deliberations last year, we published a survey of more than 300 business owners that showed a clear majority felt that tax rates should not be increased at a time of economic uncertainty. However almost half agreed that there should be more bands of income tax to reflect a broader range of incomes.

Yet only some business owners will actually pay these new tax rates in Scotland.

Biz Rates - BudgetingWhile tax on income from salaries and pensions is subject to Scottish rates, tax on income from savings and dividends will still be taxed at UK rates (with the revenue flowing to the UK Chancellor, not the Scottish Finance Secretary). In particular, this means that business owners will pay different rates of tax on their income, depending upon whether they are a sole trader/partnership or a company director.

ICAS has explored this issue further by looking at the different tax treatment of small business owners using these hypothetical case studies.

It’s too early to say whether these differences in the tax treatment of small businesses will have unintended consequences, for example encouraging more businesses choosing to incorporate.

But with a debate about income tax now likely to become an annual event in Scotland, FSB will be keeping a close eye on the impact on the small business community.

Susan Love is policy manager for the FSB in Scotland  See how FSB have campaigned on this issue

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