Will payroll software be able to deal with changes to Scottish income tax?
19 January 2018
We knew in November 2017 with the publication of a discussion paper ‘the role of Income Tax in Scotland’s budget’ that there was the possibility of a new tax regime in Scotland with up to six income tax bands. The Scottish draft budget was then published on 14 December 2017 with proposals to:
- Introduce a new 19p Starter Rate of tax
- Freeze the basic rate at 20p
- Introduce a new Intermediate Rate of 21p
- Increase both the Higher Rate and Top Rate by 1p respectively
One of our first thoughts after this announcement was will existing payroll software be able to cope with such a short timeframe as the changes are proposed to come in from April 2018. We put out a quick poll question on the back of this news through the CIPP website and after over 350 responses it became apparent that many people do not know if their software will cope (49%). If you fall into this category do watch out for your annual update from your software provider and make sure you take the time to read and digest the relevant details.
Of the remaining respondents, 9% said that their software would not cope with the changes but encouragingly, 42% said that they knew that their software would. We have since spoken to our contacts within in the payroll software development industry and MHR legislation manager, Neil Tonks ChMCIPPDip, (who incidentally is one of our first members to achieve Individual Chartered Status), said:
“For us, the additional Scottish tax bands aren’t really a problem – it’s just data like any other year except this time there’s a bit more of it. Our system is designed to deal with any number of tax bands so we didn’t have to do anything to cope with the additional ones. The only thing we had to make a software change for was the existence of the additional SD2 tax code which goes with the extra band which now exists above the basic rate band. We discovered that when we made the changes a couple of years back to cope with the concept of Scottish tax, we hadn’t allowed for the possibility that Scotland and the rest of the UK might have different numbers of D tax codes (there are 3 in Scotland next year but only 2 elsewhere), so we had to fix that, but it was no great problem as it only affected the screen validation that stops people entering invalid codes.
These comments from a software developer’s perspective are certainly encouraging for the payroll community. Neil went on to say that he hoped MHR’s experience will be mirrored with other developers. “It was always assumed that the number of tax bands in Scotland would diverge from the rest of the UK at some point so this ought to have been taken into account by everyone when Scottish tax was first introduced. The D code issue will be specific to MHR, probably, and others might have similar small changes to make but I’d not expect anyone to have huge difficulties.”
The 20% rate for Scotland is still being classed as the basic rate despite a lower rate being introduced which is good given that there are various calculations operated around the basic rate; for example Relief at Source for pension contributions will be unaffected, as will the earnings assessment for Employer Supported Childcare (vouchers) as this is also based on the rUK rates and thresholds. However the changes will affect PAYE Settlement Agreements (PSA) calculations and record-keeping.
If the Scottish Parliament ratify these proposals, employers and payroll departments may receive a few more queries when the first payslips go out but that tends to happen anyway with statutory changes. We are relying on the Scottish Parliament not to go with an alternative solution as they did last year with the 40% threshold. Neil’s own words about this are likely to echo those of the whole payroll software community:
“…if that happens, we’ll just have to deal with it and get an update out to the customers!”
The onus is on HMRC to ensure the timely and accurate issue of tax codes. Address maintenance is also key and this is solely down to the tax payer; they must ensure they are updating HMRC when they change address. According to a report by the NAO, 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.