Should a strip of the existing screed be cut back down to the concrete base before building the new blockwork up, or just build the new blockwork up on top of the screed?
If you are building directly off a concrete floor slab, instead off a proper foundation then you may as well leave the screed in as the chance of failure is the same.
for garages you can build straight off the edge of the slab - but they don't have insulation under. Presumably yours does, I'm not sure if that would make a difference to the chances of breaking the slab? For building the whole house off a pile of insulation, they always put loads of rebar in the concrete.
No, the screed is straight into the concrete, the wall would only be 4" over from the original so any existing footing's position might be significant.