A recap on who, what and when, designed to help with 2016/17 self-assessment tax returns.

When are the changes from?

From 6 April 2016 people who live in Scotland pay a proportion of their income tax to the Scottish government. The Scottish rate of income tax (SRIT), as introduced by the Scotland Act 2012, is charged on those defined as Scottish taxpayers. This is a change from the old system, where all income tax was paid to the UK government to fund spending across the whole of the UK.

How does it work?

All the main rates of income tax for Scottish taxpayers are reduced and replaced by the Scottish Rate of Income Tax:

Scottish Rate of Income Tax 2016/17

Current UK Income tax rates UK tax rates reduced by 10 percentage points Scottish rate set by Scottish Parliament for tax year 2016-17
Basic rate 20% Reduced Basic rate 10% 10%
Higher rate 40% Reduced Higher rate 30%
Additional rate 45% Reduced Additional rate 35%

The Scottish Rate of Income Tax doesn’t apply to income from:

  • savings such as building society interest
  • dividends.

Tax on the above income stays the same for all taxpayers across the UK. Note that the existing UK income tax thresholds and allowances will still apply and will continue to be set by the UK government.

While the Scottish Parliament has the power to set the Scottish rate of income tax HMRC continues to be responsible for its collection and management. As such income tax remains part of the existing UK income tax system and is not a devolved tax.

What is the definition of a ‘Scottish taxpayer’

The definition of a Scottish taxpayer is quite complicated. It generally focuses on the question of whether the taxpayer has a ‘close connection’ with Scotland or elsewhere in the UK. The existence of that ‘close connection’ will usually be determined by where an individual has his or her place of residence in the course of a tax year.

Common misconceptions

None of the following factors will cause an individual to be a Scottish taxpayer if their place of residence is outside of Scotland:

  • national identity – regarding oneself to be Scottish
  • location of work – working in Scotland
  • location of income source – receiving a pension or salary from a Scottish entity
  • travelling in Scotland – driving a lorry in or frequent work visits to Scotland.

Therefore, for the vast majority of individuals, the question of whether or not they are a Scottish taxpayer will be a simple one – they will either live in Scotland and thus be a Scottish taxpayer or live elsewhere in the UK and not be a Scottish taxpayer.

However, the government acknowledges that there will be complications and so they have released detailed guidance which is available here.

There is also more guidance on the issue of a taxpayer who owns homes in both Scotland and the rest of the UK available here.

What is the Scottish rate of income tax?

Currently the rate is 10% so apart from the division of the tax between Scotland and the UK, a taxpayer affected by the changes should not pay any more tax overall as the following table illustrates:

The table shows the total rate you pay if your personal allowance is £11,000 (2016/17). You don’t get a personal allowance if you pay additional rate tax.

UK rate for England, Wales and Northern Ireland Income band UK rate paid in Scotland Scottish rate Total rate for Scottish taxpayers
Basic rate 20% £11,001 – £43,000 10% 10% 20%
Higher rate 40% £43,001 – £150,000 30% 10% 40%
Additional rate 45% Over £150,000 35% 10% 45%

Employers’ responsibilities

It is the responsibility of HMRC to identify employees who will pay the Scottish Rate of Income Tax and decide what tax they pay. Employers and pension providers don’t need to decide this and should only use a Scottish tax code if HMRC tells them to. To ensure that tax payments are as accurate as possible, employers should, however, encourage their employees to contact HMRC when they move address.

HMRC should have issued tax codes to employers before April 2016 to identify employees who are Scottish taxpayers. Employers will deduct tax at the appropriate rates, but will not need to change how they report or make payments for income tax to HMRC.

Article from ACCA In Practice