Scottish rate of income tax

06 June 2014

Here is the HMRC briefing:

Background

The Scottish rate of Income Tax is a new power introduced in the Scotland Act 2012 to allow the Scottish Parliament to affect the amount of income tax paid by Scottish taxpayers. It replaces the Scottish Variable Rate (SVR), which has been in place since 1999 (but never used).

This new rate of income tax will be administered by HMRC as part of the UK-wide income tax system and applied to non-savings income of those defined as Scottish taxpayers.

The Scottish Parliament will be able to set the rates of income tax lower, higher or the same as the rates that apply in the rest of the UK. If they set a different rate, it will apply to all the main income tax rates – the basic rate, the higher rate and the additional rate.

Scottish taxpayers

The Scottish Rate of Income Tax paid by the Scottish taxpayer will be calculated by reducing basic, higher and additional income tax rates by 10p in the pound and adding the new Scottish Rate of Income Tax. The Scottish Rate of Income Tax (SRIT) will apply for full tax years and will be based on the customer’s main place of residence.

The definition of a Scottish taxpayer is focused on where an individual lives, not where they work. A Scottish taxpayer is someone who is resident in the UK for tax purposes and

… has their main place of residence in Scotland for the greater part of the tax year, or (if they cannot identify a main place of residence)

Or… spends more days in Scotland than in the rest of the UK in the tax year.

Or … is a Scottish Parliamentarian.

HMRC will amend the SA Return to ensure the customer is aware of, and agrees, their Scottish taxpayer status. The amendments will take place from April 2017, for the 2016/17 SA Returns.

Employers

HMRC will tell employers whom they should treat as a Scottish taxpayer by identifying them with a Scottish tax code (building on the infrastructure put in place for the SVR). HMRC will also be making changes to the Self Assessment and pensions Relief at Source processes and systems as a result of the introduction of the Scottish rate.

Employers will need to operate tax tables and perform a tax calculation appropriate to the SRIT set by the Scottish Government. There will not be any change to how the employer operates (reports or makes payments) for income tax, other than to apply the appropriate tax code, that HMRC will advise, to their employee’s weekly/monthly processes.

Pension providers

For the 2016/17 and 2017/18 tax years the Government has agreed that the Pension Provider can have longer to implement the changes required for the Scottish Rate of Income Tax. For these two years (also known as the transitional period), the Pension Provider will claim the basic rate Relief at Source at the rest of the UK (rUK) rate, regardless of the scheme member’s Scottish taxpayer status and irrespective of any difference in the rUK basic rate and SRIT basic rate.

From 6 April 2018, all Pension Providers (and their IT systems) should be ready to claim Relief at Source at the appropriate basic rate, according to the customers Income Tax status. HMRC will tell the Pension Provider which scheme members are Scottish taxpayers prior to the beginning of each tax year, from the 2018/19 tax year going forward. This will enable the Pension Provider to claim the correct basic rate of Relief at Source according to the customer’s Income Tax status.

Next Steps

We will be providing more information to you about how to reflect this change in your payroll software packages for Employers later this year.

More information can be found in the Memorandum of Understanding between HMRC and Scottish Government was published on 4 April 2013. For more information and to view some “Frequently Asked Questions” go to http://www.hmrc.gov.uk/news/mou-sri-tax.htm