The Scottish rate of Income Tax was introduced in the Scotland Act 2012.
The Scottish Government has proposed that the Scottish rate will be 10% for the tax year 2016 to 2017.
Identifying Scottish taxpayers
It’s where you live, not where you work, that decides whether you’re a Scottish taxpayer.
If you live in one place during a tax year, and it’s in Scotland, you’ll be a Scottish taxpayer. If you live anywhere else you won’t be.
If you move to or from Scotland, have more than one home, or don’t have a home, you’ll need to work out if you’re a Scottish taxpayer.
You can only be a Scottish taxpayer if you’re resident in the UK for tax purposes.
If the address HMRC holds for you is in Scotland, you’ll be sent a letter to check your address is correct. These letters started to go out on 2 December 2015.
You’ll be classed as a Scottish taxpayer if the address HMRC holds for you is in Scotland. It’s your responsibility (not your employers’) to notify HMRC if you change your address.
Your April 2016 tax code will begin with the letter ‘S’ to show you’re a Scottish taxpayer.
If you pay your Income Tax through your wages, HMRC will advise your employer to treat you as a Scottish taxpayer so you don’t need to do anything.
If you fill in a Self Assessment tax return you’ll declare if you’re a Scottish taxpayer on the return.
What Scottish taxpayers will pay
UK Income Tax rates will be reduced by 10 percentage points for people living in Scotland. You’ll then pay the Scottish rate of 10% on top of your UK rate. For example, if you pay tax at the basic rate of 20% this will reduced to 10%. You’ll then pay the Scottish rate of 10% on top of this, giving a total of 20%.
There is no overall change to the Income Tax rate you pay – whether you pay the basic, higher or additional rates. But some of the Income Tax collected under the Scottish rate will fund the Scottish government, and the rest will fund the UK government.
The Scottish rate of Income Tax doesn’t apply to income from savings such as building society interest or income from dividends. This rate will stay the same for all taxpayers across the UK.
HM Revenue and Customs (HMRC) will collect the Scottish rate of Income Tax on behalf of the Scottish government.
National Insurance contributions are unaffected by the introduction of the Scottish rate of Income Tax.
Employers and Pension Providers
HM Revenue and Customs (HMRC) will identify who’ll be a Scottish taxpayer. Employers and pension providers don’t need to decide this and should only use a Scottish tax code if HMRC tell them to. If your employee or pension scheme member disagrees with their tax code ask them to read the guidance on the Scottish rate of Income Tax before contacting HMRC.
You won’t need to change how you report or make payments for Income Tax to HMRC other than to apply the Scottish rate of Income Tax code to your Scottish taxpayer employees.
You must still apply the Scottish tax code for a Scottish taxpayer even though, overall, the amount of tax they pay isn’t changing.
PAYE forms and payslips
Forms P6 and P9 will be amended to show the correct tax code for UK and Scottish taxpayers.
You’ll need to adjust your IT systems to collect the correct amount.
If you’re given a P45 with a Scottish tax code follow the current process. If a new starter doesn’t give you a P45, or you’re unsure which tax code to use, use the rest of the UK tax code and rate. HMRC will tell you if you need to change the tax code.
You won’t need to show the Scottish rate separately on the P60 or payslips but they should show a Scottish tax code.
The current process for week 1/month 1 won’t change and HMRC will tell you which tax code to use. Apply the code to their income for the year to date. Any resulting under or overpayments will usually be corrected in-year.
From 6 April 2015, the 50% overriding limit for PAYE deductions will apply to both UK and to Scottish rate tax calculations.
Scottish tax tables will be provided for Scottish tax codes.
Employee or pension scheme member changes address
If an employee changes their address in year, HMRC will reassess their taxpayer status and reconcile their tax using the current processes.
Make sure your employees or pension scheme members know they need to tell HMRC if they change their address, to ensure that they’re given the correct tax code.
PAYE Settlement Agreements (PSA)
From tax year 2016 to 2017 you’ll need to account for both UK and Scottish rates of Income Tax for a PSA. The relevant forms and guidance will be updated nearer the time. You’ll need to use the relevant tax rates (UK or Scottish) to work out the correct tax due.
Pension Relief at Source (RAS)
The UK government has agreed that registered pension scheme administrators and pension providers have until April 2018 to put in place the changes necessary to their IT systems that will allow them to claim Relief at Source (RAS) at the correct rate.
Until then all RAS claims will be made at the UK basic rate. Any adjustments that might be needed will be made by HMRC through Self Assessment or through PAYE coding.
Pension schemes operating net pay
If you’re operating a net pay arrangement pension scheme you’ll deduct pension contributions from your employee’s gross pay giving them full relief at the appropriate Income Tax rate.
Guidance for software developers including calculations and test data for the Scottish rate of Income tax.
This page will be updated with further information as it becomes available.
Find out more about the Scottish rate of Income Tax and who it applies to.
The June 2015 edition of the Employer Bulletin contains more information on the Scottish rate of Income Tax.