Impact of the Scottish Rate of Income Tax

Also featured in The Courier Business Matters Magazine on 25 August 2015

The Scottish Rate of Income Tax (SRIT) will come into effect on April 6th 2016 and, depending on the rate at which it is set, it could have a real impact on whether Scotland becomes more – or less -attractive as a place to work. Given the shortage of skilled workers in several sectors, this could have a significant impact on our economy, one way or another.

A key question for many people is – am I a Scottish taxpayer? An even bigger question may be – do I want to be a Scottish taxpayer? That question cannot be answered until the Scottish rate of income tax is announced.

Draft guidance has recently been published by HMRC detailing how they will determine if you are a Scottish taxpayer. First and foremost you must be UK resident for tax purposes, a complex decision process in itself. After that you must meet one of the following three conditions:

  1. You are a member of the Scottish parliament
  2. You have a ‘close connection’ with Scotland
  3. If you have no ‘close connection’ then you spend more days in the tax year in Scotland than in any other part of the UK.

Many people may want to claim that they have a ‘close connection’ with Scotland, but in this context it means you have only one residence and that residence is in Scotland. If you have more than one residence, one of which is not in Scotland, then it will be necessary to establish which residence is your main residence.

SRIT may have a significant influence on the availability of skilled workers in Scotland. The rate will apply to non-savings income. If set below 10% (the amount by which the UK income tax rate will be reduced before adding the SRIT) then Scotland may attract more professionals and academics to work here. If set above 10% the converse may apply, and many non-skilled workers may also choose to move south of the border if a more attractive tax regime is in operation there.

An interesting example in the guidance relates to students coming to study in Scotland. If that student has a job here to help fund their studies and, therefore, does not travel home in between terms, then they will most likely be considered a Scottish taxpayer. Will this influence students in coming to study in Scotland?

Employers need to be prepared to apply the SRIT through their payroll. This will be effected by the issue of appropriate PAYE codes. It is not clear at the moment how an individual can challenge HMRC’s decision on their tax status. Do they appeal their PAYE code? Further guidance is required.

For the majority of individuals their status will be straightforward. As always with tax legislation the difficulty will be in determining the status of the few complex cases and the draft guidance fails to address some of these areas, particularly in relation to someone who may only be UK resident for part of the year. It will be important to keep records to support your position.

The Scottish Rate of Income Tax, together with changes to the taxation of savings income and dividends all commencing 6 April 2016, will make a big difference for many people to their take home pay and for some, where they call home.