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Scottish Rate of Income Tax - Facts

Author Image The Technical Team
13 minutes read
Last updated on 6th Apr 2018

Overview

Scottish income tax is only payable by Scottish taxpayers.

There are a number of tests to determine Scottish taxpayer status. Place of residence is key to establishing whether an individual is a Scottish taxpayer. For the vast majority of individuals, the question of whether or not they are a Scottish taxpayer will be a simple one - they will either live in Scotland and thus be a Scottish taxpayer or live elsewhere in the UK and not be a Scottish taxpayer. 

Scottish income tax applies to non-savings, non-dividend income only (earnings, pension and most other taxable income). Scottish taxpayers pay the same tax as the rest of the UK on savings and dividends income.

Key points

  • Income tax powers were partially devolved to the Scottish government by the Scotland Act 2012. 

  • The Scotland Act 2016 built on this and since 2017/18, the Scottish Parliament has had power to set income tax rates and limits applicable to non-savings and non-dividend income to those defined as Scottish taxpayers. 

  • From the 2018/19 tax year, the Scottish Government has introduced two new tax bands, meaning that Scottish taxpayers now have 5 tax bands. The rest of the UK has 3 tax bands.

  • Only the Basic Rate of income tax has been set in line with the rest of the UK for 2018/19, all other rates will differ.

  • Reliefs and allowances, such as Personal Allowance, are not devolved and remain set by the UK government. 

  • Scottish residence is determined by where the main home of the individual is situated.

Devolution of Scottish Income Tax since 2012

The powers the Scottish government have over tax broadly fall into three categories:

  • Fully devolved taxes
  • Partly devolved taxes
  • Assignment of Taxes

The Scotland Act 2012 introduced Land and Buildings Transaction Tax and Scottish Landfill tax as fully devolved taxes, these have been in place since 1 April 2015. Income tax partially devolved to the Scottish government by the Scotland Act 2012 was the power to charge the Scottish rates on non-savings and non-dividend income to those defined as Scottish taxpayers.

Scotland Act 2016 built on this and provided the Scottish Parliament full flexibility over the income tax rates and limits applicable. It is important to note that the definition of a Scottish taxpayer and the type of income the Scottish rate applies to are unchanged and this remains a partly devolved power. HMRC continue to be responsible for the collection and management of Scottish income tax, and as such it remains part of the existing UK income tax system meaning that it is not a fully devolved tax.

The Scotland Act 2016 also allowed for Air Departure Tax to be fully devolved with effect from April 2018 (although at time of writing its introduction has been delayed). Aggregates Levy is also fully devolved, as yet it is undecided when this will come into effect. VAT receipts will be partly assigned to Scotland from 2019/20.

What does it apply to?

The Scottish rate of income tax applies to non-savings, non-divided income only. This comprises earnings, pensions, taxable social security payments, trading profits and income from property.

The Scotland Act 2016 gave the Scottish Parliament the power to set income tax rates and bands and, until 2018/19, the rates and limits remained largely similar to the rest of the UK.

Scottish Rate Resolution was passed on 20 February 2018.  As well as introducing the Starter Rate and the Intermediate Rate bands, the resolution changes the Scottish rates for the 2018-19 tax year.  The limits are as follows:

  • Starter rate charged on income up to a limit of £2000

  • Basic rate charged on income above £2000 and up to a limit of £12,150

  • Intermediate rate charged on income above £12,150 and up to a limit of £31,580

  • Higher rate charged on income above £31,580 and up to a limit of £150,000

  • Top rate charged on income above £150,000

Rates and bands for 2018/19

Since 6 April 2016  tax codes have started with an ‘S’ for Scottish taxpayers. In addition, the self-assessment tax return has a box to inform HMRC that the Scottish rate applies.

Rates for Non-Savings, Non Dividend Income

 

Scotland

UK

Starter Rate

19%

N/A

Basic Rate

20%

20%

Intermediate Rate

21%

N/A

Higher Rate

41%

40%

Additional Rate

46%

45%

Income Limits

 

Tax Band for Non-Savings, Non-Dividend Income

Tax Band for all other types of Income

 

Scotland

UK

Scotland

UK

Personal Allowance

£11,850*

£11,850*

£11,850*

£11,850*

Starter Rate

£11,851 - £13,850

N/A

N/A

N/A

Basic Rate

£13,851 - £24,000

£11,851 - £46,350

£11,851 - £46,350

£11,851 - £46,350

Intermediate Rate

£24,001 - £43,430

N/A

N/A

N/A

Higher Rate

£43,431 - £150,000**

£46,351 £150,000**

£46,351 - £150,000**

£46,351 £150,000**

Additional/Top Rate

£150,001** and over

£150,001** and over

£150,001** and over

£150,001** and over

* Assumes individual in receipt of the Standard Personal Allowance

** Personal Allowance reduced by £1 for every £2 earned over £100,000

Who is a Scottish taxpayer?

An individual can only be a Scottish taxpayer if they are resident in the UK for tax purposes. The legislation defines a Scottish taxpayer as an individual who:

  • Has a ‘close connection’ with Scotland
  • Has no ‘close connection’ with Scotland but spends more days of that year in Scotland than in any other part of the UK
  • is an MP for a Scottish constituency, an MEP for Scotland or an MSP

If an individual does not live in and has no connection to Scotland, they will not be a Scottish taxpayer. For an individual who lives in Scotland for the full tax year, it is clear cut, they will be a Scottish taxpayer.

The situation will be different if the individual:

  • moves to or from Scotland during the year
  • has more than one home at the same time
  • has nowhere they can identify as their home

In any of these scenarios, the close connection to (main home) or number of days spent in Scotland will determine the tax status.

Moves to or from Scotland

If an individual moves to or from Scotland in the course of a tax year they will be a Scottish taxpayer if they live in Scotland for at least as much of the tax year as they live in any other country in the UK.

Alice rented and lived at a house in Birmingham for a number of years. On 30 June her rental on the Birmingham property ends and she immediately moves to a flat in Aberdeen. The time she spent living in Scotland in the tax year (1 July to 5 April) was longer than the time she lived in England (6 April to 30 June) so she is a Scottish taxpayer for the whole tax year.

Brian lived in Glasgow for many years. In the course of the tax year he sold his house in Glasgow and moved into a flat in Manchester where he stayed before moving to a new house in Bristol. During the tax year he spent:

125 days in Glasgow
120 days in Manchester
120 days in Bristol

Brian is not a Scottish taxpayer for the whole of the tax year because he lived in Scotland for less time than he lived in England (Scotland 125 days, England 240 days).

If HMRC changes an individual’s tax rate, the new rate will be backdated to the start of the tax year in which the move occurred. The tax taken from the individual’s salary or pension will be adjusted automatically so that the individual pays the right amount across the whole year.

If an individual has more than one home at the same time

Where an individual regards more than one place as home, one in Scotland and one elsewhere in the UK, they would count their ‘main home’ as the place they have the closest connection in terms of family, social and functional links.

This does not necessarily have to be the home where the individual spends most of their time. The main home may be where:

  • most of their possessions are
  • their family lives, for example, if they’re married, in a civil partnership or a long-term relationship
  • they are registered for things like a bank account, GP or car insurance
  • they are a member of clubs or societies

For example, if an individual lives in a home in England during the week to avoid a commute to work, but their family lives in the Scottish home and they return to the family home at the weekend. If, in addition to this, they are a member of local clubs or groups and they are registered with the local dentist or doctor, Scottish taxpayer status would apply even though they technically spend more time in England.

If an individual has nowhere they can identify as their home

This scenario could arise if an individual would not regard a place they have stayed for regular periods as home, or if they live in various places and it is not possible to identify any one as the main home.

In this instance, the number of days spent in Scotland during the tax year would be counted and compared to the number of days spent elsewhere in the UK. If the number of days spent in Scotland is more, then the individual is a Scottish taxpayer for the whole tax year.

Charlotte works for a consultancy firm  and travels round the UK on short term assignments, staying in hotels. She neither owns nor rents her own property. In the course of the tax year she spent:

150 days in Scotland
100 days in England
90 days in Wales
25 days in Northern Ireland

Charlotte has nowhere that could be regarded as home during the course of the tax year so the days she spent in Scotland are compared against the days she spent elsewhere in the UK. As the 150 days spent in Scotland are less than the 215 days spent in another part of the UK, she is not a Scottish taxpayer.

The number of days is determined by where the individual was at midnight at the end of the day.

If Dennis lived in Scotland from 10am on Monday to 5pm on Friday the same week, he spent 4 days there.

Someone who works offshore has spent a day in Scotland if they are up to 12 nautical miles from Scotland.

Where an individual is travelling between one non-UK country to another non-UK country and happen to be in the UK at midnight, it will not count as a day, unless they don’t leave the UK the next day or carry out activities not connected with travel, such as a work meeting or visiting friends.

Interaction with other aspects of Income Tax

Reliefs and allowances, such as Personal Allowance and Personal Savings Allowance remain a UK 'reserved' matter.

Capital Gains Tax (CGT) has not been devolved (nor the upper earnings threshold for NIC, IHT or Corporation Tax).

It is important to note that although there is a separate Scottish tax band for non-savings, non-dividends income, where the income tax legislation refers to a ‘higher rate taxpayer’ or the ‘higher rate threshold’ for the purposes of determining most other aspects of tax, and NI, the UK threshold of £46,350 will apply. For the purposes of determining Gift Aid and Marriage Allowance the Scottish higher rate threshold will apply, 

A draft Statutory Instrument was issued in March 2018, effective from 6 April 2018, to include references to the new Scottish tax rates and thresholds in the UK legislation.  This will ensure that the following tax reliefs will continue to work as intended:

  • Marriage Allowance
  • Gift Aid
  • Pensions relief at source
  • Social security pension lump sum
  • Finance cost relief for landlords

Marriage Allowance

Marriage Allowance allows one spouse or civil partner to transfer 10% of their personal allowance to their spouse or civil partner. Existing rules stated that the recipient must not pay tax at any rate other than basic rate, the Scottish basic rate, the dividend ordinary rate, the starting rate for savings or the savings nil rate band. There was a concern therefore that all Scottish taxpayers would be excluded as a result of the new rates. To avoid this scenario, the UK Parliament have extended the Scottish wording so that the recipient must not pay tax at any rate other than the Scottish basic rate, a Scottish rate below the Scottish basic rate, or the Scottish intermediate rate. In other words, this change simply ensures that the relief continues to work as intended.

With Marriage Allowance, taxpayers can reduce their tax bills by up to £238 in 2018/19 (£11,850 x 10% x 20%). The UK government have ensured that all those claiming Marriage Allowance in Scotland can continue to do so at the current rate of 20%

If the recipient is a Scottish taxpayer in 2018/19,and has taxable earned income of (say) £45,000 then he/she is not eligible for the Marriage Allowance.

Personal Savings Allowance (PSA)

The amount of PSA an individual is entitled to is dependent on their tax situation, it is:

  • £1,000 for a basic rate taxpayer
  • £500 for a higher rate taxpayer
  • Nil for an additional rate taxpayer

When determining the amount of PSA that applies for Scottish taxpayers, the UK threshold of £46,350 will be used. It will therefore be possible to be a higher rate taxpayer for SRIT purposes but below the UK higher rate threshold. In that case, a higher rate SRIT taxpayer will still be entitled to PSA of £1,000.

Chargeable Event Gains on Bonds

Chargeable Event Gains are savings income, therefore, the UK threshold of £46,350 should be used. This is in relation to both the rate of income tax applied to the gain and the basic to higher rate threshold for top slicing purposes.  

Gift aid

Gift Aid allows charities to claim back 25p for every £1 donated.

The UK government has ensured that Scottish taxpayers can benefit from the right rate of tax relief on Gift Aid.

Gift Aid will continue to be paid to charities at the main UK basic rate, with Scottish taxpayers able to claim the correct amount of additional relief on top of this. 

Pension Contributions

The overriding principle is that Scottish taxpayers will receive tax relief on their pension contributions at the Scottish rates.

Relief at source

Where an individual is a higher rate taxpayer for SRIT purposes, the Scottish basic rate limit will be increased by the amount of the contribution. In 2018/19, Scottish taxpayers who receive relief on their contributions at source will, continue to receive relief in their pension pot at 20%, with no adjustment for those taxed at a rate of less than 20%, and scope for those taxed at a rate higher than 20% to claim additional relief.

If you pay tax at the intermediate, higher or top rate, you can claim additional relief by completing a tax return. Nil and starter rate taxpayers do not have to repay any tax relief, as per the normal rules for non taxpayers.

Edith is a Scottish taxpayer earning £50,000. Her tax liability is as follows:

       
£11,850 @ Nil =

 

£0

 
£2000 @ 19% =   £380  
£10,150@ 20% =   £2030  
£19,430 @ 21%   £4,080.30  
£6,570 @ 41% =  

£2,693.70

 
Total  

£9184

 

If she pays a net pension contribution of £5,256 then her Scottish basic rate limited will be increased by £6,570 meaning that she has no higher rate liability. Her tax relief will be £1,314 (the relief at source added to her contribution) + £1,379.7 (the additional tax she can claim back) = £2,628/£6,570 = 41%

Her brother Felix who lives in England also earns £50,000. His tax liability is as follows

   
£11,850@ Nil  =  £0
£34,500 @ 20% = £6,900
£3,650 @ 40% = £1,460
Total  £8,360

His tax liability (before pension) is £824 lower than Edith. This can be attributed to the difference in the various limits. If Felix wanted to pay a pension contribution and obtain 40% tax relief then his net pension contribution would only need to be £2,920 (i.e. £3,650 gross).

Clearly, if Felix paid a gross pension contribution £6,570 like Edith, then his tax relief will be lower than 40%. It would only reduce his income tax liability by £730 (£3,650 x 20%) meaning his effective rate of tax relief would be just  31.1% (£1,314 +£730) / £6,570

Our Tax relief Modeller will calculate the appropriate tax relief for specific client circumstances

Net pay

Pension scheme members who pay contributions to their employer’s pension scheme under the net pay arrangement, will automatically receive tax relief on their contributions at the Scottish rates.

The annual allowance tax charge is taxed at marginal rates, therefore, the Scottish rates of income tax should be used when making the calculation for a Scottish taxpayer

© Prudential 2018