April 2019 is shaping up to be a very interesting year in the UK. With the Brexit deadline on the 29th of March, the country will be in the foothills of some long-unexplored political and economic territory outside the European Union. After the 2019/20 tax year kicks in on the 6th of April, Wales will be doing some exploratory work of its own, with rules set out under the Wales 2014 Act kicking in.

Essentially, from 2019/20 onward, Wales will be setting its own levels for the basic, higher and additional rates of Income Tax. There are some limits to what the Assembly for Wales can actually do, and a bunch of existing UK rules will stay in place. Even so, it’s being seen as a pretty big deal in principle.

Tax band basics

Under the normal UK Income Tax system, there are 3 main tax bands. Using the figures for 2018/19, income under £11,850 doesn’t get taxed at all. That’s called your Personal Allowance, which most taxpayers get automatically. Any income over the allowance is taxed at the basic rate, until it hits the threshold for the higher rate. There’s an extra, even higher, band for income over £150,000 (again, using the 2018/19 numbers).

The 2018/19 UK tax bands look like this:

  • Personal Allowance: Up to £11,850 tax-free.
  • Basic rate: Earnings from £11,851 to £46,350 taxed at 20%.
  • Higher rate: Earnings from £46,351 to £150,000 taxed at 40%.
  • Additional rate: Anything over £150,000 taxed at 45%.

Keep in mind that this is just for Income Tax. There are separate rules for things like National Insurance Contributions (NICs), Capital Gains Tax and others.

What’s changing in the Welsh Income Tax rules?

If you’re a Welsh taxpayer (we’ll talk about what that actually means in a bit), HMRC will be changing the rates you pay at every tax band after the 6th of April 2019, dropping each by 10p in every £1. So, at the basic level, you’ll be paying 10% instead of 20%, at the higher level you’ll be taxed at 30% rather than 40%, while the additional rate will drop to 35% from the UK’s standard 45%.

It sounds good so far, but that’s only half the story.

At the same time as these 3 rates are dropped for Welsh taxpayers, a new Welsh Rate of Income Tax (WRIT) will kick off. This is where the Assembly for Wales’ new powers come into play. After April, the Assembly will be able to set its own rates of tax at each band, which will be on top of the reduced rates set by the UK government. The WRIT rates can be set anywhere from 0% upward, with tax collected via the lowered UK rates going to Westminster as normal and the money from the WRIT rates collected by the Welsh government.

One more thing that’ll be changing is the tax code for Welsh Taxpayers. Under the new system, there’ll be a “C” at the front to show that the WRIT rules apply to you. If you find that C and don’t know why it’s where, or can’t find it and think it should be, you’ll need to get it checked out.

What’s not changing in Welsh Income Tax?

For one thing, the actual amount of tax being paid will be the same – at least for now. The National Assembly for Wales has confirmed that they’ll be setting the WRIT rates at 10% to kick things off in 2019/20. Obviously, by matching the amount that the old UK rates were dropped by, there won’t be any difference overall. Just as obviously, though, there’s no reason why the WRIT rates couldn’t change as the years go by, just as the standard UK rates do.

Another thing that won’t be changing is where the basic, higher and additional tax bands are actually set. That is, they’ll only change when the UK thresholds do. In the same way, the tax-free Personal Allowance most people get will stick to the same level as the main UK one.

Since the Welsh Assembly’s new powers only apply to setting the rates for the main tax bands, the figures they come up with won’t apply to income from things like savings and dividends. Those taxes will be handled by the UK government, as usual.

What happens if the Welsh Assembly starts changing the rates?

This is obviously a question that’s being batted around a lot. There’s no particular reason to believe anyone’s going to do anything crazy with the WRIT rates, but it’s definitely worth considering what a significant change from the standard UK figures could mean. The Assembly itself, for instance, has been giving thought to how changing the rates could affect things like:

  • Tax avoidance schemes and tax evasion.
  • People using tax planning to increase their tax efficiency.
  • People looking for new jobs or changing the hours they work.
  • People looking to move into or out of Wales itself.

There’s a lot of guesswork involved, but it gives you an idea of the kind of thinking that goes into decisions like this. For individuals and businesses, this is where getting professional help from specialised tax experts can make all the difference.

Am I a Welsh taxpayer?

This is going to be a big question when the changeover happens. At its most basic level, it comes down to where you’re spending your time. There are a few other twists in the tale, though, so it’s worth being sure where you stand. You can be classed as a Welsh taxpayer if:

  • You’re living in Wales.
  • You’re not living in Wales, but have close connections to it.
  • You’re spending more time in Wales than anywhere else during the tax year.
  • You’re a Welsh politician (MP or Assembly member, for instance).

There’s quite a bit if wiggle room in some of those definitions, so it’s definitely worth getting a professional opinion if you’re unsure. Keep in mind that you can’t be a Welsh taxpayer for only part of the year. If you qualify as one, you’ll be taxed as one for the whole year no matter where you’ve spent the rest of your time. If you move home, for example, any change in your tax rate will be backdated to cover the whole year and the tax taken from your salary or pension will be adjusted automatically.

Also, it’s not as simple as working out if you’ve spent “most of your time” in Wales. You could well be spending less than half the year in Wales and still find yourself paying Welsh tax. What matters is whether or not you’re spending more time in Wales than in any other single place.

There are also the little complications of people with more than one home, or who move to or from Wales at some point in the tax year. Again, it’ll all come down to the number of days you spent in Wales, and/or whether you have any “close connections” there. If you’ve got more than one home, for example, HMRC might consider where most of your family or possessions are, or where your bank accounts are registered. Even things like the GP or dentist you’re signed up with can count as connections, as could any club or society memberships.

In some cases, it might actually be difficult to say where your “home” technically is. Maybe you’ve stayed in a lot of temporary places, or divided your time equally across multiple addresses. Once again, though, if you’ve spent more time in Wales than in any other single place, the chances are you’re a Welsh taxpayer.

At the end of the day, individual taxpayers won’t be able to decide for themselves whether they’re “Welsh enough” for the new rules to apply to them. In the same way, employers and pension companies won’t be arbitrarily turning people Welsh any time soon. Those decisions will be made by the taxman. If you think you’re being categorised wrongly, you’ll have to take it up with HMRC. For one thing, you’ll want to check your Personal Tax Account – particularly if you’ve changed address. Remember that it’s your responsibility to keep that kind of information up to date and accurate.

Other tax differences in Wales

On top of the new system for Income Tax, the Welsh government also has the power to set its own rates for stamp duty. In fact, Wales has its own system called Land Transaction Tax (LTT). It applies to residential properties bought in Wales and worth over £180,000 (as of 2018/19). If you’re buying a second home, the threshold drops to £40,000. It makes no difference whether it’s a freehold or leasehold property, nor whether it’s bought outright or through a mortgage. The rates you’ll pay are:

  • The portion up to and including £180,000: 0%.
  • The portion over £180,000 up to and including £250,000: 3.5%.
  • The portion over £250,000 up to and including £400,000: 5%.
  • The portion over £400,000 up to and including £750,000: 7.5%.
  • The portion over £750,000 up to and including £1,500,000: 10%.
  • The portion over £1,500,000: 12%.

If you're baffled by all this local rates business and wondering if you're in need of a tax rebate, or just need help with your tax return, RIFT can help - give us a shout today and we'll be able to clear things up for you.