Corporate report

HMRC issue briefing: Scottish Rate of Income Tax

Published 30 November 2015

From April 2016, the Scottish Parliament will have the power to set its own rate of income tax to fund spending by the Scottish government. This briefing explains what the Scottish Rate of Income Tax is, who it will apply to and how it will be implemented.

1. What is the Scottish Rate of Income Tax?

From 6 April 2016 people who live in Scotland will pay a proportion of their income tax to the Scottish government. This is a change from the current system, where all income tax is paid to the UK government to fund spending across the UK.

2. How will it work?

All the main rates of income tax for Scottish taxpayers will be reduced by ten pence and this reduction will be replaced by the Scottish Rate of Income Tax.

The rate has yet to be announced. If it is set at ten pence, then income tax rates for Scottish taxpayers will stay the same as the rest of the UK. If it is set at a different rate, then Scottish taxpayers will pay a correspondingly higher or lower rate of income tax than elsewhere in the UK.

The Scottish Rate of Income Tax doesn’t apply to income from savings such as building society interest or income from dividends. Tax on this income will stay the same for all taxpayers across the UK. It also doesn’t affect income tax thresholds and allowances, which will continue to be set by the UK government.

HMRC will administer the Scottish Rate of Income Tax as part of the UK income tax system.

3. Who does it apply to?

The definition of a Scottish taxpayer is based on where an individual lives in the course of a tax year. Scottish taxpayer status applies for a whole tax year – it’s not possible to be a Scottish taxpayer for part of a tax year.

For most taxpayers, the location where they live will be obvious, but there will be less straightforward cases – for example, where people have more than one home, or have moved into or out of Scotland during the year. HMRC has provided guidance to help in these circumstances.

The location of a person’s employer is not relevant. So, for example, someone who works in Scotland, but has their home elsewhere in the UK, will not be a Scottish taxpayer.

A person can only be a Scottish taxpayer if they are resident in the UK for tax purposes. Read detailed guidance on who the Scottish Rate of Income Tax will apply to.

4. What happens next?

In early December we will be writing to potential Scottish taxpayers to confirm that the address held in our records is correct. If it is, taxpayers will need to take no further action.

To ensure that our address data is as accurate as possible we have accessed and compared data from a variety of different sources. However, if the address held by HMRC is out of date, or a person subsequently changes their address, they must notify us so we can apply the correct rate of income tax.

Anyone who pays income tax and has recently moved to a new address in Scotland, but doesn’t receive a letter from us by the end of February 2016, should update their address with HMRC. Taxpayers should also contact us whenever they move address, because employers and pension providers cannot do this and it may affect whether they are a Scottish taxpayer or not.

For employees and pensioners, the income tax change will be applied through PAYE (Pay As You Earn). These taxpayers will not need to do anything further, because we will advise their employers to treat them as Scottish taxpayers and apply the Scottish Rate of Income Tax. Taxpayers who complete a Self Assessment return will be asked to confirm whether they are a Scottish taxpayer in their 2016 to 2017 return.

From April 2016 Scottish taxpayers who are employed or receive a pension will have a PAYE tax code beginning with the letter ‘S’ to identify them as Scottish taxpayers.

5. What will employers need to do?

It is our responsibility to identify employees who will pay the Scottish Rate of Income Tax and decide what tax they pay. Employers and pension providers don’t need to decide this and should only use a Scottish tax code if HMRC tells them to. To ensure that tax payments are as accurate as possible, employers should, however, encourage their employees to contact us when they move address.

We will compile the list of Scottish Rate of Income Tax taxpayers and issue tax codes to employers before April 2016 to identify employees who are Scottish taxpayers. Employers will deduct tax at the appropriate rates, but will not need to change how they report or make payments for income tax to HMRC.

6. To find out more

For more information visit www.gov.uk/scottish-rate-income-tax.