What you need to know about Scottish Income Tax, even if you don’t live in Scotland

Edinburgh
By Duncan McKellar, Tax tutor

20 April 2017

In April 2016, the "Scottish Rate of Income Tax" (SRIT) was introduced for ‘Scottish taxpayers’. Since then, some of the Income Tax paid by Scottish taxpayers goes directly to Holyrood and from April 2017, the SRIT has been replaced by Scottish Income Tax.

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.

Throughout 2016/17 the introduction of this tax went largely unnoticed by the general public as Scottish taxpayers paid the same rates of Income Tax on their income 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).

The Scottish Government voted to pass a different Higher Rate tax threshold to the rest of the UK as of 6 April 2017. The rate has been set lower than the UK rate, which means more people will pay Higher Rate tax than in the rest of the UK from that date.

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.

Scottish Taxpayers

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; 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
  • They have a close connection with Scotland (or do not have a close connection with any other part of the UK and spend more time in Scotland that in any other part of the UK).

Scottish Bands and Rates

Since the introduction of SRIT, the UK income tax rates paid by Scottish taxpayers across each band is reduced by 10%. In place of this reduced rate, the SRIT has been introduced at 10%. In 2016/17, this led to Scottish rate taxpayers paying the same level of income tax as UK taxpayers.

However, as of 6 April 2017 the Higher Rate threshold for SIT will no longer be aligned with the UK Higher Rate threshold of £45,000; instead it will be £43,000.

For a Scottish taxpayer entitled to a personal allowance, higher rate SIT will be payable on non-savings, non-dividend income in excess of £43,000 (£43,000 - £11,500 = £31,500 taxable income).

SIT only applies to non-savings, non-dividend income. Therefore, the UK rates and bands must still be used for the purposes of working out the level of the personal savings allowance (‘PSA’), the rates of tax on savings and dividends, and the rates of capital gains tax.

This means that when dealing with a Scottish taxpayer's computation, parallel income tax computations may be required, applying the SIT bands first to non-savings income and then reassessing the available bands and rates when dealing with savings and dividend income.

Example

Hamish is a Scottish taxpayer. He earns £55,000 in 2017/18. £11,000 of PAYE is deducted from this income during the year. Hamish also receives £3,000 rental profit, £800 of bank interest and £450 of dividend income.


  Non-savings income Savings incomeDividend income Tax suffered
  £ £ £ £
Employment income55,000  11,000
Rental income3,000  -
Bank interest 800 -
Dividend income_________450 -
Total income58,00080045011,000
Personal allowance(11,500)____________
Taxable income 46,500 800450 11,000

The calculation of tax is therefore as shown below: 

Non-savings income (SIT rates)  £
£31,500@ 20%6,300
£15,000@ 40%6,000
______@ 45%-
Savings income (UK Rates)  
£500@ 0% (PSA)-
______@ 20%-
£300 @ 40%120
______@ 45% 
Dividend income  
£450@ 0% (Dividend allowance)-
______@ 7.5% 
______@ 32.5% 
______@ 38.1% 
Total tax liability 12,420
Tax already suffered  (11,000)
Tax remaining due 1,420

The interaction of the SIT and the UK rates and bands can give rise to some unexpected consequences within the tax computation, particularly around Scottish taxpayers paying higher rate SIT on non-savings income and 0% or 20% UK tax on their savings income (by virtue of the PSA and UK bands). Marriage allowance and pension-related payments are also affected.

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