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Scottish Govt sets income tax rates and bands for 2018-19

Executive summary

The Scottish Government has now set income tax rates and bands for the 2018/19 tax year that diverge from those for the rest of the UK, with the introduction of two new tax bands to create a “starter rate” and “intermediate rate”. The addition of new bands and rates creates a number of administrative and operational challenges that employers will need to consider from 6 April 2018. They also raise some policy questions for employers with assignees moving to or from Scotland, including where employees move between Scotland and other parts of the UK.

The Scottish tax rates apply to those deemed to be a Scottish taxpayer. Scottish taxpayers will broadly be those resident in the UK for tax purposes who meet any of the following three conditions:

  • They have a “close connection” to Scotland through either:
  • A single place of residence in the UK which is based in Scotland, or
  • More than one “place of residence” in the UK, but their “main place of residence” is in Scotland for at least as much of the tax year as it has been in any one other part of the UK.
  • No “close connection” to Scotland (or any other part of the UK) but spends at least as many days in Scotland as in any other part of the UK.
  • A Scottish Parliamentarian.

Key announcements

Income tax rates

The Scottish rates and bands for 2018/19 are detailed below alongside the equivalent for the rest of the UK (these income bands apply to income in excess of any available personal tax free allowance):

Proposed 2018/19 Scottish rates

 

Proposed 2018/19 Scottish tax bands

£

2018/19 UK rates

 

2018/19 UK tax bands

£

Starter rate 19%

0 – 2,000

 

 

Basic rate 20%

2,001 – 12,150

Basic rate 20%

0 – 34,500

Intermediate rate 21%

12,151 – 31,580

 

 

Higher rate 41%

31,580 – 150,000

Higher rate 40%

34,501 – 150,000

Additional rate 46%

Over 150,000

Additional rate 45%

Over 150,000

The Scottish tax rates and bands only apply to UK taxable non-savings and non-dividend income received by a person when they are a Scottish taxpayer. They do not apply to earnings that are sourced to a period when the person was a Scottish taxpayer that are received when the person is no longer a Scottish taxpayer (either because they have moved elsewhere in the UK or because they have become non-UK resident). It is not possible to be a Scottish taxpayer if non-UK resident which means the Scottish rates and bands cannot apply to UK source income for non-UK residents.

Administrative and operational consequences for employers

PAYE withholding

HMRC issue PAYE codes with an ‘S’ suffix for individuals believed to be Scottish taxpayers. The additional Scottish bands for 2018/19 mean that some new PAYE codes will be required. HM Revenue and Customs (HMRC) have told us that the codes used to collect tax at a flat rate are to be changed as follows:

  • Basic rate 20%: code SBR (this code already applies to basic rate taxpayers)
  • Intermediate rate 21%: code SD0 (this code currently applies to higher rate taxpayers)
  • Higher rate 41%: code SD1(this code currently applies to additional rate taxpayers)
  • Additional rate 46%:  code SD2

There is a potential for confusion here if new codes are not issued to those currently on code “SD0” or “SD1” as they will see an unexpected reduction to the flat withholding rate if the existing code is simply carried over.

Employers using a modified payroll arrangement for tax equalised assignees working in the UK must ensure the best estimate of the PAYE due is calculated using the Scottish rates and bands where it is reasonable to assume that the employee will be a Scottish taxpayer for the tax year. For modified payroll it is the employer’s responsibility to determine whether the employee is likely to be a Scottish taxpayer because HMRC do not issue codes, so will not issue an ‘S’ code, for an employee on a modified payroll.

Savings and dividend income

As the Scottish rates and bands apply to non-savings and non-dividend income only, for a Scottish taxpayer who has both earned income, such as employment salary, pension, profits from self-employment or rental profits, and taxable savings (bank interest) or dividend income, it is necessary to consider both the UK rates and bands and the Scottish rates and bands in order to work out a Scottish taxpayer’s income tax liability. Inevitably the tax calculation for a Scottish taxpayer with different types of income is going to be even more complicated than it already is.

Pension contributions

As the Scottish basic rate is expected to remain at 20% but with a much narrower income band, the main impact for 2018/19 in relation to tax relief for pensions is likely to be a significant increase in Scottish taxpayers needing to submit a claim for excess relief where they have paid tax at 21% or higher.

Relief for Scottish taxpayers under the relief at source method (where pension contributions are made from net pay after tax and the pension scheme claims a basic rate tax credit directly from HMRC) does not appear to be restricted in any way by the new 19% Scottish starter rate, this means individuals contributing to that type of UK registered pension scheme will still get relief at 20% even if the income being relieved is taxed in Scotland at 19%.

Charitable donations

The Scottish tax rates do not affect the rate of tax claimable by charities under the Gift Aid scheme, so that will continue to be at a rate of 20% in all cases. Where a Scottish taxpayer claims excess relief for Gift Aid contributions that will be based on the difference between the Scottish basic rate and the actual rates of Scottish income tax paid.

Expatriate tax issues

It will make sense for a UK outbound assignee Scottish taxpayer who is tax equalised to be equalised based on the Scottish tax rates and bands. However, it is clearly for individual mobility programmes to decide as a matter of policy whether to base hypothetical tax on Scottish rates and bands or the rates and bands for the rest of the UK.

Mobility programmes will also need to consider whether, or to what extent, assignments within the UK that involve employees moving to or from Scotland should be subject to tax equalisation. As there are now scenarios where an assignment to Scotland from the rest of the UK could create additional income tax liabilities, it will be important for policies to be clear on the extent to which employers will cover any such costs.

Other issues

There are various tax and benefit rules that apply by reference to whether individuals are higher rate taxpayers. For certain Scottish taxpayers it will be important to determine whether the rules apply based on the Scottish bands or the UK bands. For example, the level of the savings allowance for a Scottish taxpayer is determined by assuming, for that purpose, that the individual is not a Scottish taxpayer. In contrast, the availability of the transferable marriage allowance for a Scottish taxpayer is determined based on whether they pay income tax at a rate other than the basic rate in Scotland. The UK Government has said that the marriage allowance rules will be amended to take account of the Scottish starter and intermediate rates in due course.

Next steps

Employers will need to take into account the new Scottish rates and bands and consider the impact of these in respect of assignments to and from Scotland. Mobility policies will need to be updated to take into account the differences between Scottish tax rates and those of the rest of the UK, as they are likely to result in increasing differentials for assignees to and from Scotland.

Employers should also ensure that the PAYE and modified PAYE withholding is applied correctly for anyone expected to be a Scottish taxpayer.

EYG no. 01141-183Gbl

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