What you need to know about Scottish Income Tax, even if you don’t live in Scotland
From April 2018, the introduction of five bands of Scottish Income Tax (SIT) may mean significant changes in the way Scottish taxpayers' income tax liabilities are calculated.
This revenue is now part of the Scottish Government’s budget and the block grant to the Scottish Government from Westminster has been reduced accordingly.
The Scottish Rate of Income Tax (SRIT) was introduced in April 2016, however, this tax went largely unnoticed by the general public as Scottish taxpayers paid the same rates of Income Tax as taxpayers elsewhere in the UK.
Under the Scotland Act 2016, Scotland became responsible for setting its own rates and bands of Income Tax from 6 April 2017, when SRIT was also re-named Scottish Income Tax (SIT).
In the 2017/18 tax year, the higher rate threshold for SIT was set lower than the UK rate, which meant more people paid Higher Rate tax than in the rest of the UK from that date. In 2018/19 the changes will become more significant as five bands of tax have been introduced, as opposed to the three bands used in the rest of the UK.
SIT is payable by Scottish taxpayers on their non-savings and non-divided income only; the UK rates of tax continue to apply to savings and dividend income.
A Scottish taxpayer is principally defined by their close connection with Scotland. Firstly, the individual must be UK resident and secondly, they must meet any one of three tests:
- They are a Scottish Parliamentarian (i.e. they are a member of the Scottish Parliament); or
- They have a single ‘place of residence’ (home), which is in Scotland or where they have more than one ‘place of residence’, having their ‘main place of residence’ in Scotland for at least as much of the tax year as it has been in any one other part of the UK; or
- Where no other ‘close connection’ is established, through day counting.
Scottish Bands and Rates
For 2017/18 the SIT basic rate band threshold was £31,500 compared to the UK threshold of £33,500, meaning that any taxable non-savings income in excess of this would be taxed at the higher rate.
For 2018/19, five bands of SIT have been introduced. They, and their 2017/18 equivalents, are as follows:
|Starter rate on income up to||n/a||£2,000||19%|
|Basic rate on income||£1-£31,500||20%||£2,001-£12,150||20%|
|Intermediate rate on income||n/a||£12,150-£31,580||21%|
|Higher rate on income||£31,501-£150,000||40%||£31,581-£150,000||41%|
|Addtional rate on income over||£150,000||45%||n/a|
|Top rate on income over||n/a||£150,000||46%|
As noted previously, SIT only applies to non-savings income, therefore the UK rates and bands must still be used for the purposes of working out the level of the savings allowance, the rates of tax on savings and dividend income, and the rates of capital gains tax.
This means that when dealing with a Scottish taxpayer’s computation you may need to complete parallel income tax computations, applying the SIT bands to non-savings income and then reassessing the available bands and rates when dealing with savings and dividend income.
The interaction of SIT and the UK rates and bands can give rise to some unexpected consequences within the tax computation; for example, Scottish higher rate taxpayers can be entitled to the full £1,000 personal savings allowance normally reserved for basic rate taxpayers. This is because a Scottish higher rate taxpayer may be classed as a basic rate taxpayer when using the UK income tax bands.
Hamish is a Scottish taxpayer. He earns £55,3500 in 2018/19 from his employment with the Forestry Commission. £8,756.50 of PAYE is deducted from this income during the year. Hamish also receives £3,000 rental profit from a holiday let he owns, £800 of bank interest and £450 of dividend income.
|Non-savings income||Savings income||Dividend income||Tax suffered|
The calculation of tax is therefore as shown below:
|Non-savings income (SIT rates)||£|
|Savings income (UK Rates)|
|£500||@ 0% (PSA)||-|
|Dividend income (UK Rates)|
|£450||@ 0% (Dividend allowance)||0.00|
|Total tax liability||12,727.50|
|Tax already suffered||8,756.50|
|Tax remaining due||3,971.00|
Note: when considering the rates payable on the savings and dividend income the UK bands must be applied to taxable income. With taxable income of £47,750 (£46,500 + £800 + £450), Hamish is a UK higher-rate taxpayer. He is entitled to a PSA of £500. His UK basic rate band has been utilised by his non-savings income (£46,500).
If Hamish were not a Scottish taxpayer, his non-savings income would be taxed at 20% (£34,500) and 40% (£12,000). The tax on his savings and dividend income would be the same. His tax liability would decrease to £11,820 with £3,063.50 remaining due after the deduction of PAYE. The overall decrease would be £907.50.