Scottish income tax

These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.

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The Scottish Government were given powers to set a Scottish rate of income tax to apply to Scottish taxpayers from 6 April 2016.

For the 2016/17 tax year, Scottish taxpayers were subject to UK tax at 10% lower than the full UK rates with the Scottish Government able to set a Scottish rate of Income Tax on top of this to apply to Scottish taxpayers. They were only able to set one tax rate to apply to all tax bands and they chose to set a rate of 10%. This meant that Scottish taxpayers paid tax at the same rates as taxpayers in the rest of the UK for that tax year.

From 2017/18 onwards, the Scottish Government received additional powers to vary the tax rates for existing bands and to alter or introduce tax bands. They have no power to alter the personal allowance though – this is still set by the UK Government.

In 2017/18, the only change made by the Scottish Government was to freeze the higher rate threshold at £43,000 for Scottish taxpayers whilst the threshold for taxpayers in the rest of the UK increased to £45,000.

For 2018/19, the Scottish Government made further use of their powers to alter the tax rates and bands in the 2018/19 tax year. The result is that, for 2018/19, there are five different tax bands for Scottish tax payers. So, there is now a clear divergence in the rates of tax Scottish taxpayers pay, compared to the ‘rest of the UK’.

The table below compares the Scottish tax rates and bands with the UK tax rates and bands for the 2018/19 tax year:

Scottish tax rates compared to UK tax rates
Scottish rates and bands UK rates and bands
Band name Amount Rate Band name Amount Rate
Personal allowance £11,850 0% Personal allowance £11,850 0%
Starter rate £11,851 - £13,850 19%      
Basic rate £13,851 - £24,000 20% Basic rate £11,851 - £46,350 20%
Intermediate rate £24,001 - £43,430 21%      
Higher rate £43,431 - £150,000 41% Higher rate £46,351 - £150,000 40%
Top rate Above £150,000 46% Additional rate Above £150,000 45%

Source for Scottish rates and bands: http://www.gov.scot/Resource/0053/00530863.pdf(Opens new window)

Source for UK rates and bands: https://www.gov.uk/government/publications/autumn-budget-2017-overview-of-tax-legislation-and-rates-ootlar/annex-a-rates-and-allowances(Opens new window)

The table assumes a person is in receipt of the standard UK personal allowance, which is set by the UK Government. Please note that the personal allowance is reduced by £1 for every £2 earned over £100,000 for both UK and Scottish taxpayers.

Scottish Income Tax applies to employment, pensions and rental income. It does not apply to savings or dividend income so UK rates continue to apply to income from these sources. HM Revenue & Customs (HMRC) still administers the operation of Scottish Income Tax although money collected from it effectively goes to the Scottish Government.

Firstly, a person must be UK resident for tax purposes in order to be a Scottish taxpayer. In other words, if someone is not UK tax resident then they cannot be a Scottish taxpayer. 

A person is classed as a Scottish taxpayer by their residency status rather than their nationality or where they work. Essentially, someone is a Scottish taxpayer if their sole or main residence is in Scotland. An individual will either be resident or non-resident in Scotland for a tax year. So, a UK resident will either be classed as a Scottish taxpayer or a UK taxpayer for a tax year – there cannot be a situation where someone is treated as a Scottish taxpayer for part of a year. 

Every MSP (member of the Scottish Parliament) is classed as a Scottish taxpayer. In addition, every MP (member of the UK Parliament) and MEP (member of the European Parliament) who represents a Scottish constituency is classed as a Scottish taxpayer, irrespective of where they live.

An individual must tell HMRC if they move address to or from Scotland. If HMRC changes a person’s tax rate, the new rate will be backdated to the start of the tax year in which they moved. The tax taken from a person’s salary or pension income will adjusted automatically so the correct amount of tax is paid for the relevant tax year.

There will be situations where determining residency status may not be straightforward. HMRC’s technical guidance on Scottish taxpayer status includes a number of examples of this. Here’s a selection to highlight the type of examples covered:

  1. A person lives in England during the week but stays in a holiday home in Scotland each weekend. Their doctor is in England, their English address is used on the electoral register and their car is registered to their English address. HMRC say that this person has two places of residence but their main place of residence is in England so they are not a Scottish taxpayer.
  2. A person lives in England but moves to Scotland in July to live and work. HMRC say that this person has two main places of residence in the tax year but their main place of residence is in Scotland as this is where they will spend the most time in the tax year.  They will therefore be a Scottish taxpayer for that tax year.
  3. A person lives in England but works offshore in Scottish waters on a four weeks on/four weeks off basis. Their possessions are at their home in England, their car is registered to that address and they are also registered to vote there. HMRC say the person’s main place of residence is in England so they are not a Scottish taxpayer.
  4. A person has lived and worked in England for a number of years. They start a one year secondment in April in Scotland so rent out their home in England. They move into accommodation provided by their employer and change their home address for bank accounts and energy suppliers to their new temporary address. They also change their voting address and doctor’s surgery. Despite still owning a home in England and intending to return there after the secondment ends, their main place of residence for the tax year is in Scotland. They are deemed to have a close connection with the country and are therefore treated as a Scottish taxpayer. 
  5. A person has a family home in Scotland but works in Wales during the week. They stay in a rented flat whilst in Wales and return home to Scotland each weekend.  Their Scottish address is where they are registered to vote and is used for all correspondence matters. Their doctor’s surgery is also in Scotland. The person’s main place of residence is in Scotland so they have a close connection with the country and are therefore deemed to be a Scottish taxpayer.
  6. A person is a US citizen and employed by a US company. They accept a two year secondment to the UK where they will be based in Scotland. They will be treated as a UK resident from the date they arrive in the UK. They rent a house in Scotland for the two years only returning to the US to visit family during holidays. The person is UK resident for tax purposes whilst they are in the UK and their place of residence is in Scotland. They have a close connection with Scotland and are therefore treated as a Scottish taxpayer. 

In practice, HMRC will determine a taxpayer’s status. Where someone has moved between Scotland and the rest of the UK during a tax year, taxpayer status will be based on the longest number of days spent in Scotland or the rest of the UK.

A Scottish taxpayer has the prefix ‘S’ at the start of their PAYE tax code. HMRC issue PAYE tax codes usually prior to the start of each tax year to employers and pension providers.

Since 6 April 2016, pension providers have to tax annuity payments and drawdown income payments, subject to PAYE tax, using the Scottish rates for Scottish taxpayers. They need to do this using ‘S’ tax code identifiers that are obtained from information provided by HMRC. 

Annual P60 statements issued to customers need to show the ‘S’ prefix tax code along with the total tax deducted. There is no need to split the total tax deducted between the Scottish Income Tax amount and the ‘rest of the UK’ amount.

The calculation method for any taxable payments made using an emergency tax code (such as Uncrystallised Funds Pension Lump Sums) have not changed since 6 April 2016. In other words, there will be no specific Scottish emergency tax code. Similarly, small pots payments are still made using the UK basic rate of income tax for Scottish taxpayers with any under or overpayment being dealt with between the recipient and HMRC. 

The different tax rates and bands that apply in 2018/19 for Scottish and ‘rest of the UK’ taxpayers, will have the following effect on pensions tax relief:

For net pay schemes - members of pension schemes who get tax relief through the ‘net pay’ method have their pension contributions deducted gross from their gross pay before income tax is calculated. So, they only pay income tax on what’s left. This method will continue to work in the same way in 2018/19, meaning that tax relief will continue to be given immediately by default at a members’ marginal rate of tax, whether that is at UK or Scottish rates. Typically, occupational pension schemes accept personal contributions using the net pay method.

For relief by claim - for the relief by claim method, personal contributions are paid gross with tax relief being claimed through self-assessment(Opens new window)(Opens new window) and this will continue to be the case in 2018/19. Typically, retirement annuity contracts accept personal contributions using this method although it can also be used where personal contributions to occupational pension schemes are not made by deduction from pay (for example, this could be where a single contribution is made by an employee).

For relief at source schemes – under a scheme operating relief at source, personal contributions are paid net of basic rate tax. The scheme administrator claims the tax relief due from HMRC and applies it to the member’s arrangement. Typically, personal pension and stakeholder arrangements accept personal contributions using the relief at source method. Where personal contributions are paid through salary, the net contribution is deducted from net pay after income tax is calculated. Scheme administrators using the relief at source method should continue to claim tax relief in 2018/19 at the rate of 20% on personal contributions for UK and Scottish taxpayers. This will have the following effect in practice:

Non-taxpayers – anyone who is a non-taxpayer will continue to get tax relief at the basic rate of 20% on personal contributions paid in 2018/19.

Scottish starter rate - Scottish taxpayers who pay the Scottish starter rate of income tax at 19% will get tax relief at 20% on personal contributions. HMRC have confirmed that they will not recover the difference between the Scottish starter and Scottish basic rate.

Basic rate (UK and Scottish taxpayers) – pension scheme members will continue to get tax relief at the basic rate of 20% on personal contributions paid in 2018/19.

Scottish intermediate rate - Scottish taxpayers who pay the Scottish intermediate rate of income tax at 21% will get tax relief at 20% on personal contributions. They will also be entitled to claim the additional 1% relief due on some or all of their contributions by either contacting HMRC(Opens new window)(Opens new window) if they don’t already complete self-assessment returns(Opens new window)(Opens new window), or through their return if they do.

Higher, top or additional rate (UK and Scottish taxpayers) - any UK or Scottish taxpayer paying tax at the higher rate, UK additional rate or Scottish top rate will get tax relief at 20% on personal contributions. They will also be entitled to claim additional tax relief on their contributions up to their marginal rate of tax from HMRC. Again, this can be done by either contacting HMRC(Opens new window)(Opens new window) if they don’t already complete self-assessment returns(Opens new window)(Opens new window), or through their return if they do.

From 6 April 2018, pension providers operating relief at source schemes need to have systems in place to be able to identify Scottish taxpayers based on information provided by HMRC. Scheme administrators need to use this identifier to collect the correct amount of basic rate tax relief from HMRC for any personal or third-party contributions paid from 6 April 2018 onwards.

In practice, this will happen through pension scheme members in relief at source schemes receiving tax relief on their contributions based on their ‘residency tax status’. This status will be identified through an exchange of information between scheme administrators and HMRC. A scheme administrator operating a relief at source scheme must send HMRC an annual return of individual information for each tax year and this must be done by 5 July each year. This annual return contains information about each member and includes details of contributions made and tax relief given.

Starting in January 2018, HMRC will send an electronic ‘notification of residency status’ report on an annual basis to scheme administrators, confirming each individual scheme member’s residency tax status. For example, the reports that HMRC will send out in January 2018 will be based on the information submitted by scheme administrators in their annual returns of individual information for the tax year 2016 to 2017. HMRC’s report will show for each scheme member either:

  • an S for Scottish tax status
  • a U for unmatched individuals
  • a blank field for rest of the UK

Uploading this information on an annual basis for each individual customer should allow scheme administrators to claim the correct amount of tax relief for their scheme members for contributions made in 2018/19 and subsequent tax years. Any unmatched results will require further investigation. 

A scheme administrator can only hold one residency status for a scheme member and that residency status must be applied for the whole tax year. If someone’s residency status changes in a tax year (for example, if they move from Scotland to somewhere else in the UK or vice versa), then a scheme administrator should continue to use the status they have on record for the rest of the tax year. HMRC will then collect or repay any shortfall or excess directly to the member at the end of a tax year.

Scheme members who were not listed in a scheme administrator’s 2016/17 annual return won’t be included in HMRC’s electronic report in January 2018. For example, any scheme member who joined a registered pension scheme after 5 April 2017 won’t be included in the relevant electronic report sent to the scheme administrator by HMRC in January 2018. To address this issue for the 2018/19 tax year and for future tax years, HMRC have developed an online residency tax status look-up service. The aim is to allow scheme administrators to check the residency tax status for new members and for members who have re-started contributions so that they can claim the correct tax relief for those scheme members immediately. It will be possible to use the look-up service for a single member or for multiple members on a bulk basis.

If a scheme administrator doesn’t use the look-up service before applying relief at source to a member’s first contribution, then they must default the member’s residency status to ‘rest of the UK’ and use this for the rest of the tax year. If there is a shortfall or excess of relief at source at the end of the tax year, HMRC will collect or repay this directly to the member.

The minimum contribution required for automatic enrolment or qualifying schemes from 6 April 2018 is 2% of qualifying earnings for employers and 3% of qualifying earnings for employees. The 3% employee contribution includes tax relief. So when Scottish income tax comes into force, how should employers calculate how much to deduct from pay for pension contributions for Scottish taxpayers? 

As an example, assume an employer has a Scottish jobholder with gross qualifying earnings of £2,000 in the pay reference period. The employee contribution of 3% works out at £60. This is the gross personal contribution. The amount that the employer should deduct from pay and pass to the pension provider is 80% of the gross contribution i.e. £48. The pension provider will add 20% tax relief to this, taking the contribution back to £60.

HMRC have said that they will continue to explore the most appropriate way to cater for the new income tax rates and bands announced by the Scottish Government, as well as future changes by the devolved administrations. In other words, they may review their approach to pensions tax relief on an ongoing basis should rates and bands change significantly in the future.

As a related point, the Welsh Government have confirmed that they will have partial control of income tax rate setting for Welsh taxpayers(Opens new window) from April 2019. This looks like it will work in the same way as the process used by the Scottish Government in 2016/17. That is, the UK government will reduce each of the 3 rates of income tax – basic, higher and additional rate – paid by Welsh taxpayers by 10p. The National Assembly for Wales will then decide the 3 Welsh rates of income tax, which will be added to the reduced UK rates. The combination of reduced UK rates plus the Welsh rates will determine the overall rate of income tax paid by Welsh taxpayers. 

Even though there is scope for the Scottish tax rates to be different to UK rates, the operation of the existing double taxation treaties that the UK has with many other countries will continue unaffected.

Pensions Technical Services