The rates and bands of tax that apply to Scottish taxpayers’ employment income will change significantly from 6 April 2018. Scottish taxpayers will be subject to new Starter and Intermediate rates. The higher and top rates will increase to 41% and 46%. Employers should consider the practical implications.
Individuals will be ‘Scottish taxpayers’ for a particular tax year if they are UK resident and, based on their place of residence, have a ‘close connection’ with Scotland.
Individuals who cannot establish a ‘close connection’ with either England, Northern Ireland, Wales or Scotland in a tax year will be ‘Scottish taxpayers’ if they spend at least as many days in Scotland as in the rest of the UK combined.
Therefore, it might be necessary to count days spent in Scotland during a tax year in order to assess ‘Scottish taxpayer’ status.
Identifying Scottish taxpayers
Employers should operate PAYE based on the Scottish rates and bands only where HMRC has issued a PAYE code with an ‘S’ prefix.
However, when operating modified payrolls, employers will be required to assess an employee’s status as a ‘Scottish taxpayer’.
Employers should therefore confirm they have systems in place that would allow Scottish taxpayers to be identified should this be required.
PAYE Settlement Agreements (PSAs)
When calculating the tax due under PSAs, employers will need to take into account the new Scottish rates and bands of income tax in relation to employees who are ‘Scottish taxpayers’.
Employers should consider whether employees on assignment from the UK should be equalised by reference to the Scottish system if, had they remained UK resident, they would have been ‘Scottish taxpayers’.
Employers should also consider whether to introduce an intra-UK tax equalisation policy in respect of long term employee secondments between other parts of the UK and Scotland.
The cost of assigning an employee to Scotland will increase due to these changes.
Relief for pension contributionsThe new Starter rate has the potential to complicate relief at source for pension contributions. This relief is currently given at 20% but, from 6 April 2018, Starter rate taxpayers will have a marginal tax rate of 19% (on earnings between £11,850 and £13,850).
HMRC has announced that scheme administrators who operate relief at source will claim income tax relief at 20% for all Scottish taxpayers for 2018/2019, as they do at present. Starter rate taxpayers will not be required to repay the difference between the income tax relief given at source and their marginal rate of income tax.
Whilst this issue does not directly affect pension contributions made via salary sacrifice, HMRC’s approach will mean that the income tax benefit of participating in salary sacrifice arrangements, compared to remaining in or moving to relief at source arrangements, will be reduced for Starter rate taxpayers.
This is because the tax relief available to those participating in salary sacrifice will be at 19% (rather than the 20% rate available to those in relief at source schemes who do not participate via salary sacrifice).
However, as employee’s NIC would still be saved at 12% on any sacrifice into a pension, Starter rate taxpayers should still realise savings by participating in salary sacrifice arrangements.
Intermediate rate (21%) taxpayers who did not previously need to claim pension relief will need to claim the additional 1% relief from 6 April 2018 via self-assessment or a PAYE coding adjustment.
Employers operating relief at source pension plans should consider updating their guidance to ensure affected employees are made aware of these changes prior to 6 April 2018.
Employers should consider whether it would be appropriate to undertake an employee communication exercise to explain the implications of the imminent changes for employees who are, or are likely to be, Scottish taxpayers.
If you have any queries, please do not hesitate to get in touch with your normal contact or e-mail us.