The Scottish Parliament has confirmed the income tax rates and bands that will apply to relevant income of Scottish taxpayers in 2019/20. What does this mean for individuals and employers?
Alan Turner, Head of Tax in Scotland, commented:
"The Scottish Government’s proposals for income tax passed today when, in return for local taxation reform, the Scottish Green Party abstained from voting on the Scottish Rate Resolution.
The rates and bands proposed at the Scottish Draft Budget on 12 December last year will therefore come into force on 6 April (provided there are no revisions in the event of a ‘no deal’ Brexit).
The deal reached between the SNP – which forms the minority Scottish Government – and the Scottish Greens involves local authorities being given the power to introduce a Workplace Parking Levy, should they choose to do so. There will be a consultation on giving local authorities the power to impose a Transient Visitor Levy. Non-domestic rates empty property relief will also be devolved to local councils."
The rates and bands for 2019/20
The income tax rates and bands that will apply to relevant income of Scottish taxpayers for 2018/19 are set out below.
|Band||Range*||Maximum taxable income||Rate|
|Starter||Above £12,500 to £14,549||£2,049||19%|
|Basic||Above £14,549 to £24,944||£10,395||20%|
|Intermediate||Above £24,944 to £43,430||£18,486||21%|
|Higher||Above £43,430 to £150,000||£106,570||41%|
* The ranges of relevant income assume entitlement to a full standard Personal Allowance (which is set each year by the UK Parliament). The Personal Allowance is reduced by £1 for every £2 of income that exceeds £100,000.
What income is subject to the Scottish rates and bands?
The Scottish income tax rates and bands apply to relevant income (broadly, non-savings and non-dividend income) of Scottish taxpayers.
Interest and dividend income of Scottish taxpayers remains subject to income tax based on the main UK rates and bands.
Who is a ‘Scottish taxpayer’?
The criteria for being a ‘Scottish taxpayer’ will change slightly from 2019/20. The summary below is based on the position from 6 April 2019.
An individual will be a 'Scottish taxpayer' if they:
– Have a 'close connection' with Scotland based on the location of their place of residence; or
– Do not have a 'close connection' with any of England, Northern Ireland, Scotland or Wales based on place of residence, but spend more days in Scotland than in any other individual part of the UK (i.e. England, Northern Ireland and Wales, each considered separately).
An individual will be a 'Scottish taxpayer' – or not – for the whole of each relevant UK tax year.
What is a 'close connection' with Scotland?
If an individual’s sole place of residence in the UK during a particular tax year is in Scotland, they will have a ‘close connection’ with Scotland and therefore be a ‘Scottish taxpayer’.
If an individual has more than one place of residence in the UK during a particular tax year (e.g. if during that year the individual moves house or owns a second residential property), they will be a ‘Scottish taxpayer’ if their main place of residence is located in Scotland for longer than it has been located in any other individual part of the UK [i.e. England, Northern Ireland and Wales] each considered separately).
When does day counting apply to identify Scottish taxpayers?
Individuals who are resident in the UK for tax purposes but do not have a sole or main place of residence there will need to count the days spent in each part of the UK in order to determine whether or not they are subject to the Scottish rates on relevant income.
Relevant individuals will be ‘Scottish taxpayers’ in a particular tax year if they are present in Scotland for more days than they are present in any other individual part of the UK (i.e. England, Northern Ireland and Wales, each considered separately).
The day counting test might apply to individuals who, for example, spend 183 days or more in the UK during a particular tax year in a succession of places of temporary accommodation.
Moving between Scotland and another part of the UK
For individuals whose sole or main place of residence changes to or from Scotland during the course of a tax year, it might not be possible to confirm whether or not they are ‘Scottish taxpayers’ until after that year has ended.
As ‘Scottish taxpayer’ status applies for the whole of a particular tax year, the amount that such individuals have paid via PAYE for that year might not correspond to their final income tax liability.
In these circumstances, any under or over payment of income tax would be addressed via the Self-Assessment system or a PAYE coding adjustment.
What should individuals do?
Individual taxpayers are responsible for ensuring that any change in their personal circumstances that causes them to become, or cease to be, a ‘Scottish taxpayer’ is notified to HMRC.
Individuals should therefore review and assess their Scottish taxpayer status. HMRC’s detailed technical guidance is available here.
Identifying Scottish taxpayers
Usually, employers will be obliged to operate PAYE based on the Scottish rates and bands only where HMRC has issued a PAYE code with an ‘S’ prefix in respect of an employee.
However, when operating modified payroll withholding, employers will be required to make an assessment of an employee's status as a ‘Scottish taxpayer’.
Employers should therefore confirm that they have appropriate systems in place that allow Scottish taxpayers to be identified if required.
Employees seconded to the UK from abroad will be tax equalised by reference to their home country rates.
However, employers should consider whether employees seconded abroad from the UK should be tax equalised by reference to Scottish rates of income tax if they would have been ‘Scottish taxpayers’ had they remained UK resident.
Employers should also consider whether it might be appropriate to introduce an intra-UK tax equalisation policy in respect of long term employee secondments between Scotland and other parts of the UK.
Employers should consider whether it would be appropriate to undertake an employee communication exercise to explain the implications of the prospective income tax changes for employees who are, or are likely to be, Scottish taxpayers.
KPMG can assist individuals and employers to administer devolved income taxes by: