The Scottish Rate of Income Tax
As part of the changes that were introduced in the Scotland Act 2012, the Scottish Rate of Income Tax (SRIT) is due to come into effect on 6th April 2016.
This new rate will only apply to Scottish tax-payers and has been set by the Scottish government at 10%.
How will SRIT work?
The basic, higher and additional rates of tax will each be reduced by 10%. The new rate of 10% set by the Scottish government will replace this 10% reduction – so for 2016/17 basic, higher and additional rate taxpayers will be taxed at 20, 40 and 45% respectively.
The SRIT will only apply to income received by an individual from employment, self-employment, pensions, trusts and rental property. The rates for dividends, capital gains and bank interest will not be affected as these rates are still controlled by the UK government.
The Scottish parliament does not currently have the power to change the income tax bands so for Scottish tax-payers these will remain the same as for the rest of the UK.
As a result, for 2016/17 Scottish taxpayers will be no better or worse off than UK taxpayers.
The SRIT will be collected by HMRC. HMRC will issue each Scottish tax-payer with a special ‘S’ tax code to ensure that their income is taxed at the Scottish rate.
Who qualifies as a Scottish tax-payer?
The definition of a Scottish tax-payer is focused on where a person lives (or resides) rather than where they work. For the majority, the question of whether they are a Scottish tax-payer will be relatively simple as they will either be a UK resident who lives solely in Scotland, (making them a Scottish tax-payer) or they will live elsewhere in the UK and be unaffected by the new rate. However, for some, determining whether they are a Scottish tax-payer is more complex.
Individuals who have more than one residence in the UK will need to establish where they spent more time during the tax year (their “main place of residence”). This will mostly be determined by counting the days they spent in Scotland and spent elsewhere in the UK. If they spent more days in Scotland then they qualify as a Scottish tax-payer.
Other factors that may help determine a person’s main place of residence include where they are registered to vote; where they have registered with a doctor/dentist; where they keep the majority of their possessions and where their children attend school.
HMRC are sending letters to individuals who will be classed as Scottish taxpayers for the 2016/17 tax year.
Further changes?
The Scotland Bill 2015 is currently going through parliament with the aim of devolving more powers to the Scottish parliament. One of these powers is the ability to set income tax rates and bands. If the bill passes through Westminster, Holyrood, and receives Royal Assent (expected next spring), it will give the Scottish parliament complete control over the income tax bands and rates for Scottish taxpayers.
However, as with the SRIT, the Scottish parliament will not be able to change the tax rates on savings income (e.g. bank interest) or dividend income. In addition, control over personal allowances and capital gains will be retained by Westminster and taxes will continue to be collected by the HMRC.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at February 2016. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 319 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.
