PAYROLL INSIGHT
in it. In 2018–19 he would not have been classified as a Scottish taxpayer, precisely because he had collectively spent more days outside Scotland than in it. Employers need to be aware of this crucial distinction when planning work, keeping records and handling queries from employees. It is vital that employees are able to demonstrate where they were on any particular day, to establish which jurisdiction they are a taxpayer of. For some people, this will change on a year by year basis and, depending on the tax rates, could mean they pay more, or less, income tax. It may be that the employee will need to rely on employer records such as expense claims to establish his taxpayer status. What about NICs? National Insurance contributions (NICs) are reserved to the Westminster government and not affected by devolution. However, there is an NIC- shaped elephant in the room. The UK higher rate threshold for income tax has gone up to £50,000, but the UK NIC upper threshold mirrors the UK income tax threshold – such that those who are employed will pay 12% NICs on earnings within the basic rate band from 6 April next year. The UK basic rate band may have widened by £3,000, but the NICs’ 12% band, which applies across the whole UK including Scotland, has widened by £3,442. Only on earnings above £50,000 does the primary NICs rate payable by employees now drop to 2%. In addition to this, due to the Scottish Budget announcements, the gap between the higher rate thresholds has widened between Scotland and the rest of the UK in 2019–20, by £6,569. As such, there will be Scottish taxpayers paying an effective rate of tax of 53% on earnings between £43,430 and £50,000 in 2019–20. ● Pay policies – Strategically speaking, employers need to understand that there are potentially going to be differences in the take-home pay of employees who earn the same gross salary in each jurisdiction. In Scotland, there are now five rates and bands of SIT, and currently the Welsh Assembly is sticking to the Running payrolls across jurisdictions
same rates as those applied in England and NI, although this may change. This could cause issues, especially where the employments are covered by a collective agreement. Employers may need to consider their remuneration, recruitment and retention policies. A collaboration between payroll, pensions, finance and human resources is inevitable. ● Dealing with employee queries – Queries from employees in Scotland should be expected and employers should know where to direct these queries. Pensions tax relief, marriage allowance and gift aid may be relevant, and HMRC has provided useful links to each of these anomalies on gov.uk. Something that Scottish taxpayers need to do where they pay tax at the intermediate rate of 21% is to claim the additional 1% of tax relief on any pension contributions they make into a relief at source scheme. (Note tax relief will continue to be given at 20%.) Payroll managers could assist employees by communicating this to them on the payslip because it is likely most of them will not know they need to do this themselves. Unfortunately, it is also likely many will not bother, which seems rather unfair. ● Prefix S and C codes – The main issue with multi-jurisdictional payroll is the additional knowledge, software and admin required to cater for Scottish, English and Welsh payrolls. Allocation of employees to the correct payroll is not discretionary – employers need to wait until the coding notices arrive with prefix ‘S’ codes denoting Scottish taxpayers and prefix ‘C’ (for Cymru) codes denoting Welsh ones. Without a coding notice, all employees should be on the default rest of UK payroll. ● PAYE settlement agreements – Separate PAYE settlement agreements (PSAs) will need to be set out where the tax rates and bands differ – currently software houses as they also need adequate lead-in time to configure updates ... frustrating for payroll
only for Scotland, but perhaps in future Welsh rates and bands will diverge, too. This might be difficult because PSAs do not require individual employees to be detailed, yet because benefits provided to Scottish employees need to be grossed up using Scottish rates and bands, this distinction needs to be made at the time the benefit is provided at risk of it being forgotten downstream. What happens if rates aren’t voted in by 5 April each year? Ever wondered what happens if Scotland/ Wales fail to reach a consensus on the draft Budget proposals each year? Income tax remains an annual tax which the UK government introduces by way of an annual Finance Act. Scotland and Wales must also vote through an annual income tax rate, but if this was to not happen for some reason (e.g. because cross-party consensus cannot be agreed on the draft Budget proposals), the legislation is set out to revert to UK rates and bands of income tax. Crucially, however, Scotland and Wales would receive none of this income, as their rates would default to 0%. As income tax is the biggest source of revenue, it is imperative that this income is received each year. In Scotland, this principally comes from section 80 of the Scotland Act 1998 but it also ties in to the Income Taxes Act 2007 and the Scotland Acts 2012 and 2016 in a very circular way. The timing of the UK Budget in autumn does not leave the Scottish and Welsh administrations much time to prepare their own budget proposals and vote them through by April. This is frustrating for payroll software houses as they also need adequate lead-in time to configure updates. n Conclusion Devolution was never going to be easy and has complicated the personal tax computation of individuals, making tax even more opaque and thus more difficult for the public to understand. ICAS has produced The ICAS Guide to Scottish Taxes (https://bit.ly/2EkKcCl) which explains what is happening in Scotland. Finally, please note that the CIPP has produced a handy article-finder on any policy issues which relate to devolution (https://bit.ly/2T22ySM).
| Professional in Payroll, Pensions and Reward | April 2019 | Issue 49 22
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