Scottish rate of income tax – does it affect you?

November 23, 2015

There is a worry that the public is confused about SRIT, The Scottish rate of income tax and what it all means.

There have been hints from Holyrood that income tax rates in Scotland may remain the same as rates elsewhere in the UK, at least until 2018, so do you need to worry about SRIT?

The short answer is ‘yes’.

• SRIT stands for the Scottish rate of income tax and will come into force from 6 April 2016.
• It applies to non-savings income on which income tax is paid, for example salary and pension but excludes interest income and dividend income.
• The main UK income tax rates will be reduced by 10p and the Scottish Parliament can replace this with a Scottish rate of income tax (SRIT) which must be applied equally to all Scottish taxpayers.
• If SRIT is set at 10p, then income tax rates will be the same as the rest of the UK, but SRIT can be increased (with no upper limit) or reduced to zero.
• The Scottish Government is likely to set the SRIT for the 2016-17 tax year during their Autumn Budget.
• SRIT will be paid by Scottish taxpayers and the focus for defining a Scottish taxpayer is on where an individual lives in the course of a tax year. The onus will be on Scottish taxpayers to inform HMRC of any changes to their circumstances where SRIT may no longer apply.
• Individual Scottish taxpayers will be informed by HMRC if they need to pay SRIT later this year and employees will be issued with PAYE codes prefixed with “S”.

Impact of SRIT being set at a different rate

From April 6 2016 the tax rate for residents in Scotland will reduce by 10p, leaving the Scottish Government free to adjust it accordingly.

If it wants to stick with the status quo, that would mean setting the SRIT at 10p, with the basic rate remaining at 20p, the higher band at 40p and the additional rate at 45p.

The Scottish Government will initially have to make the same changes to each of the tax bands.  So if, for example, it wishes to increase the additional rate to 50p in total, this would also mean an increase to 25p and 45p for the other two bands. That may limit what the Government decides to do in the short term.

Who will be affected by SRIT?

Legislation defines who will be classed as a Scottish taxpayer and technical guidance from HMRC clarifies that those who are residents of Scotland will be liable for the SRIT: https://www.gov.uk/government/publications/scottish-rate-of-income-tax-technical-guidance-on-scottish-taxpayer-status/scottish-rate-of-income-tax-technical-guidance-on-scottish-taxpayer-status

Essentially, it will apply to anyone who counts a Scottish address as their home.  An individual will be a Scottish taxpayer is they are resident in the UK for tax purposes and satisfy any of three tests within a tax year:

1. Represent a Scottish constituency in the Scottish Parliament.
2. They have a close connection to Scotland (a single place of residence which is Scotland, or their main place of residence is in Scotland for at least as much of the tax year as it has been in another part of the UK).
3. The individual spends at least as many days in Scotland as elsewhere in the UK.

In 99% of cases that should be a straight forward process. However, when it comes to businesses with employees who travel for the majority of the year or who don’t necessarily count a single property as their home, it becomes a bit complicated.

If an employee moves to another part of the UK, the short answer is that which tax system they fall under will depend on where they have stayed for the longest period of time during the tax year.

It is up to the individual to inform HMRC if they move address, providing all the necessary dates. If they want to be reclassified for the following tax year, it’s their responsibility to do something about it.

Communicating to those who will pay SRIT

The Scottish Government is expected to set the 2016-2017 SRIT during their Autumn Budget.  These new rates will apply to all non-savings income, i.e. employment, self-employment and pension income and excluding dividend and interest income.

HMRC will determine who has to pay SRIT and recently issued a business bulletin highlighting the SRIT’s introduction. In advance of the new tax year HMRC will be issuing tax codes with “S” as a prefix, known as S codes, identifying the individuals who will be liable for the new Scottish rate.

While the Scottish taxpayer position is a decision for HMRC and the individual, HMRC has begun its communications campaign with employers, and a media campaign aimed at individuals is also planned. On top of that, residents of Scotland can expect a letter through their doors this year notifying them if they will be liable for the new SRIT.  Any individual receiving a letter and disagreeing with HMRC’s decision should contact them immediately.

Most employees are more likely to contact their employer, rather than HMRC, to get an understanding of what it means – hence the decision to contact employers first. For organisations, that means it’s a good idea to have answers prepared.

And what next?

The new Scotland Bill currently before the Westminster Parliament proposes that in future (perhaps by 2018) the Scottish Parliament will have unrestricted powers to set the income tax rates and thresholds to be applied to the non-savings non-dividend income of Scottish taxpayers.

This means the Government will no longer need to increase or decrease the different income tax bands by the same amount, as is the case under SRIT.

If you would like to talk more about how the Scottish Rate of Income Tax might affect you,  please call me or drop me an email.