Background – What is the Scottish Rate of Income Tax?
The Scotland Act 2012 gives the Scottish Parliament the power to set the Scottish Rate of Income Tax in order to fund spending by the Scottish Government. The Scottish Rate of Income Tax (SRIT) comes into effect from April 2016. While the Scottish Parliament will have the power to set the Scottish Rate of Income Tax, HMRC will continue to be responsible for the collection and management of the SRIT. As such Income tax will remain part of the existing UK income tax system and is not a devolved tax.
How will the Scottish Rate Work?
All of the main rates (the basic, higher and additional rates) of income tax for Scottish taxpayers will be reduced by 10p and this reduction will then be replaced by the SRIT.
The SRIT will be set annually by the Scottish Parliament and the impact of the rate implemented is summarised below -
- A 10p SRIT would mean that the income tax rates for Scottish taxpayers would be the same as in the rest of the UK.
- Any rate less than 10p would mean that the income tax rates for Scottish taxpayers would be lower than in the rest of the UK.
- Any rate greater than 10p would mean that the income tax rates for Scottish taxpayers would be higher than in the rest of the UK.
The first SRIT has yet to be announced by the Scottish Parliament however this will be set and published prior to its introduction at the start of the 2016/2017 tax year on 6 April 2016.
The SRIT does NOT apply to income from savings such as bank or buildings society interest or income from dividends. Tax on this income will stay the same for all taxpayers across the UK. The SRIT also does NOT affect income tax thresholds and allowances (such as the personal allowance) which will continue to be set by the UK Government.
Will the SRIT affect higher earners more than others?
No, there will only be one Scottish Rate of Income Tax, and it will affect the basic, higher and additional rates of income tax.
For example, the income tax rates for the rest of the UK for the next tax year 2016/2017 will be:
- Basic rate – 20%
- Higher rate – 40%
- Additional rate – 45%
If the SRIT is set at 9p, the income tax rates for Scottish taxpayers would be:
- Basic rate – 19%
- Higher rate – 39%
- Additional rate – 44%
Who does the SRIT apply to?
The definition of a “Scottish taxpayer” is based on where an individual lives in the course of a tax year. Scottish taxpayer status applies for an entire tax year – it will not be possible to be a Scottish taxpayer for part of a year and a UK tax payer for another part of the same tax year.
The location of a person’s employer is NOT relevant therefore someone who works in Scotland but has their home in another part of the UK will not be a Scottish taxpayer.
Therefore, for most taxpayers it will be obvious whether you are a Scottish taxpayer or not. You will pay the SRIT if you have your home in Scotland or if you live in Scotland for at least as much of the tax year as you live in another part of the UK.
There will, of course, be less straightforward cases – for example where people have more than one home or have moved into or out of Scotland during the tax year. HMRC has provided guidance to assist individuals with less straightforward circumstances.
One important point to note is that a person can only be a Scottish taxpayer if they are resident in the UK for tax purposes.
HMRC’s detailed guidance can be found at: https://www.gov.uk/hmrc-internal-manuals/scottish-taxpayer-technical-guidance
What happens next?
Very shortly, HMRC will be writing to potential Scottish taxpayers in order to confirm that the address held on record by HMRC is correct. This is to help HMRC determine whether an individual is considered to be a Scottish taxpayer or not.
It is your responsibility to ensure that the address held on record by HMRC is accurate therefore if you do not receive a letter from HMRC by the end of February you should contact HMRC to provide them with details of your current address so that they can determine whether you are a Scottish taxpayer or not.
How do I pay the SRIT?
For employees and pensioners, the SRIT will be collected via the UK PAYE (Pay As You Earn) system and therefore no further action is required.
From 6 April 2016 Scottish taxpayers who are employed or receive a pension will be identified by having a PAYE tax coding beginning with the letter “S”. This prefix will tell your employer or pension provider that you are a Scottish taxpayer and therefore the SRIT will be applied to your earnings or pension.
As advised earlier in this communication, there will be no change to how your PAYE tax coding is made up as a result of the introduction of the SRIT, the coding will simply be prefixed by an “S”. Therefore if the standard PAYE tax coding for 2016/2017 is 1100L, the Scottish tax code will be S1100L.
Taxpayers who complete a Self-Assessment tax return for the 2016/2017 tax year will be asked to confirm whether they are a Scottish taxpayer tax year within the tax return.
What does my employer need to do about the SRIT?
It is HMRC’s responsibility to identify employees who will pay the SRIT and decide what tax they pay. Employers and pension providers do not make this decision therefore a Scottish tax code will only be used by an employer or a pension provider if HMRC instruct the employer or pension provider to do so.
However, as advised earlier in this communication, it is critical to ensure that HMRC has the correct address on record for all employees and pensioners therefore employers and pension providers should encourage their employees and pensioners to contact HMRC when they move address.
The final word
Further updates on the introduction of the SRIT will be issued by activpayroll in due course including, of course, confirmation of the rate of SRIT as soon as this is published by the Scottish Parliament.
If you have any questions in respect of this communication or require further information, please contact your dedicated activpayroll representative.