PAYROLL INSIGHT
Scottish income tax
Jill Smith MCIPPdip, CIPP policy manager, sets out the effects of changes to Scottish tax rates and earnings bands
O n 6 April 2016, the Scottish rate of income tax came into force. For the 2016–17 tax year, Scottish taxpayers (STP) were subject to tax at 10% lower than the standard UK rates; the Scottish government then set a Scottish rate to apply on top of the reduced rate to STPs. For the 2016–17 tax year the Scottish government was able to set only one tax rate to apply to all tax bands and it chose to set it at 10%. This meant that STPs paid tax at the same rates as taxpayers in the rest of the UK (rUK); the basic rate of income tax was 20%, the higher rate was 40% and the additional rate was 45%. From 2017–18 onwards, the Scottish government has had powers to vary the tax rates for existing bands and to also alter or introduce tax bands. (The personal allowance remains reserved to Westminster, so this cannot be altered by the Scottish government.) In 2017–18, it chose to freeze the higher rate threshold at £43,000 for STPs whilst the threshold for taxpayers in the rUK increased to £45,000. So, some STPs who would not have moved into a higher tax bracket under the rUK threshold (i.e. earning £44,000) found themselves paying more in tax than someone on the same earnings resident in England, Wales or Northern Ireland. Scottish taxpayer An individual can only be classed as an
STP in a year in which they are a UK tax resident. Residency is key, regardless of nationality or where their employer is based; someone is a STP if their sole or main residence is in Scotland. The exception to that rule applies to members of the Scottish Parliament; they are STPs regardless of where their main residency is located. A UK resident will either be classed as a Scottish taxpayer or a UK taxpayer for a tax year – there cannot be a situation where someone is treated as either for part of a year. ...powers to vary the tax rates for existing bands and to also alter or introduce tax bands It is important that individuals inform HM Revenue & Customs (HMRC) if they move address to or from Scotland. According to the National Audit Office, maintaining accurate address records of the 2.6 million Scottish taxpayers remains the biggest risk facing HMRC in ensuring that Scottish income tax is assessed and collected properly. From April 2016, HMRC has been telling employers whom they should treat as a Scottish taxpayer by allocating them
a tax code with a prefix letter S. If HMRC changes a person’s tax code, the new code will be backdated to the start of the tax year in which they moved. The tax taken from a person’s salary or pension income will be adjusted automatically so the correct amount of tax is paid for the relevant tax year. Change in rates and thresholds for 2018 – 19 Currently Scotland has three income bands – a 20p basic rate, a 40p higher rate for earnings over £43,001 and a 45p additional rate on earnings over £150,000. Following the draft Scottish budget in December 2017, two new bands have been added, a 19p starter rate and a 21p intermediate rate. There is also an increase to the existing 40p band to 41p, and to the 45p band to 46p; all of which are due to take effect from April 2018. At the end of January, the Scottish government also decided to reduce the higher rate threshold to £43,430 (originally planned to be £44,273). These changes to the income tax system mean that almost all employees in Scotland (STPs) will notice some difference in their take-home pay. Looking ahead to the new tax year, let’s consider some examples of how this could affect an employee who is a STP and compare them to a counterpart, resident in England, Wales or Northern Ireland who is subject to rUK
| Professional in Payroll, Pensions and Reward | April 2018 | Issue 39 16
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