From 6 April 2016, when a fundamental change to the UK taxation system comes into effect, residents in Scotland will pay two types of income tax on their non-savings income.
The main UK rate of income tax will be reduced by 10p for Scottish taxpayers and the Scottish Parliament will instead levy a Scottish Rate of Income Tax (SRIT) which will be applied equally to all Scottish taxpayers. If Parliament decides to set SRIT at 10p then income tax rates will be the same as in the rest of the UK. SRIT can, however, be reduced to zero and there is no upper limit.
Importantly, this change will not just affect Scottish employees and employers. Any employer in the UK will see a change to PAYE procedures if an employee is classed as a Scottish taxpayer. Individuals will be Scottish taxpayers if they are UK tax resident and their sole or main place of residence is in Scotland. So, if an employer based in England recruits someone who stays in temporary accommodation near the employer’s base but returns to their home in Scotland at weekends, the employer has a Scottish employee.
HMRC have given some guidance as to what this will mean for employers and there is good news:
• An employer will not have to make any assessments on taxpayer status – HMRC will identify those individuals who will be Scottish taxpayers based on their records of where individuals live. Individuals moving into or out of Scotland will be encouraged by HMRC to notify them of a change of address.
• Scottish taxpayers will have their tax codes prefixed with the letter ‘S’. There will be no requirement to include the SRIT separately on payslips but payroll software will however have to cope with the possibility of SRIT not being set at 10%.
What is the likelihood of there being different rates?
SRIT will be set by the Scottish Parliament every year, for only one tax year and for the whole of that year and the rate must be applied equally to all Scottish taxpayers. So if SRIT is set at 12%, a basic rate taxpayer would have a marginal income tax rate of 22% (rather than 20%) with 47% for and additional rate taxpayer (rather than 45%). So lower earners would have a higher increase in their tax bill compared to higher earners.
This factor will not encourage the Scottish government to set a higher rate in 2016. However, Scotland is expected to receive complete control over income tax bands and rates in 2018, under new powers devolved in the Scotland Bill.