What Changes have been Made?
From April 2016, there will be a change in tax regulation for Scottish taxpayers. Scottish taxpayers will pay 10p per pound less UK income tax, while a simultaneous new Scottish income tax will be introduced at 10p per pound. The Scottish government has the power to change this rate of tax above or below 10p if it chooses to. The new regulation is part of increased Scottish devolution, promised by the British parliament in the wake of the Scottish independence referendum.
The basic, higher and additional earning bands for income tax will continue to be the same for the rest of the UK and the Scottish Rate of Income Tax (SRIT). More information on these bands can be found on the government’s dedicated income tax page.
The amount of income tax raised from the reduced UK rate will go to the UK government. The amount of income tax raised from the new SRIT rate will go back to the Scottish government. Only Scottish taxpayers will pay into the SRIT. Income from savings and dividends will continue to be subject to UK income tax rates, and the SRIT will not apply to them.
Simplifying SRIT: an Example
The UK basic, higher and additional income tax rates are currently 20%, 40% and 45% respectively. For Scottish taxpayers, these UK rates are effectively now 10%, 30% and 35%. However, given that the SRIT is set at 10%, which is then added on top of their reduced UK rate of income tax, the overall tax rates remain at 20%, 40% and 45% for Scottish taxpayers: the only difference is that 10% of these amounts goes directly to the Scottish government.
However, if the Scottish government were to change the rate of SRIT to 11% instead of 10%, Scottish taxpayers would be paying 21%, 41% and 46% overall tax. Similarly, if they chose to reduce it to 9%, then Scottish taxpayers would pay 19%, 39% and 44% overall tax.
The SRIT will always apply equally across the three main tax bands, so the Scottish government could not, for example, set an SRIT of 8% for basic rate taxpayers and an SRIT of 12% for additional taxpayers, or vice versa.
How to Know if You’re a Scottish Taxpayer
Scottish taxpayers will be identified by their place of residence – where they live – rather than their place of work. So, for example, if you are a UK resident for tax purposes but your main place of residence is somewhere in Scotland, then you will pay SRIT.
What do I do if I’m a Scottish Taxpayer?
HMRC will identify and notify those individuals who are Scottish taxpayers. As long as HMRC has your current address details, you won’t need to do anything when the new regulation comes in – the changes will happen automatically.
HMRC will assign tax codes to the individuals it assesses and identifies as Scottish taxpayers. These taxpayers will be identified by having an “S” placed on the beginning of their tax code. HMRC must be notified of changes in address, and they will then change the tax code if it is required.
Additional Rate Taxpayers
In Scotland, almost one in seven of those who pay the additional rate of tax are a part of the health industry or in social work. These people make up a large amount of the Scottish population, as well as a significant chunk of the income tax liabilities. It is unclear how these people may react to the planned changes, although potential reactions include:
- pulling forward their income or delaying it
- receiving dividends rather than a salary
- increasing their pension contribution
- paper or physically migrating their place of residence
The SRIT will be effective from the start of April 2016. Scottish taxpayers will soon have more information on the regulatory changes, and HMRC will be communicating with Scottish taxpayers. This will allow Scottish taxpayers to review any tax planning efforts they have.