As you may be aware, from April 2016 the Scottish Parliament will be responsible for a Scottish Rate of Income Tax. This means that a proportion of the income tax you pay will be paid to the Scottish Government, as opposed to currently all of it being paid to the UK Government.

In this article we give you a brief overview of what to expect and whether or not it is likely to affect you.

HMRC Confirmation Letters

From December 2015 HMRC will start to issue letters to the 2.6 million taxpayers who live in Scotland; confirming whether that they have their correct address and whether or not they have to pay the new tax rate.

You do not need to take any action if the address HMRC holds for you is correct. If your address has changed or you do not receive a letter by the end of February 2016, but you still live in Scotland, you will need to notify HMRC as soon as possible to enable them to apply the correct income tax rate.

Details of the new Scottish Income Tax Rate are scheduled to be announced by the Scottish Government in their draft budget on 16 December 2015.

So what is it?

  • A new rate of income tax for taxpayers living in Scotland which is set by the Scottish Government, but administered by HMRC as part of the UK income tax system.
  • It will come into force in April 2016
  • The main rates of income tax for Scottish taxpayers (20%, 40% and 45% tax bands) will be reduced by ten pence and this reduction will be replaced by the Scottish Rate of Income Tax.
  • If the Scottish tax rate it is set at ten pence, Scottish taxpayers will continue to pay the same income tax as the rest of the UK. However, if the rate changes, then Scottish taxpayers will pay either a higher or lower rate of income tax than elsewhere in the UK.
  • The new Scottish Rate will not apply to income from savings such as building society interest or income from dividends. Tax on this income will stay the same for all taxpayers across the UK.
  • The new rate does not affect income tax thresholds and allowances. These will continue to be set by the UK Government.

How does it impact on me?

  • The new rate will be paid by taxpayers who live in Scotland if this is where their main residence is, even if they do no work in Scotland.
  • If you are affected by the new rate, your tax code will be prefixed by an ‘S’ and your income tax will continue to be collected from your pay and pensions in the same way as it is now.
  • If you change address you will need to contact HMRC, because employers and pension providers cannot do this for you and your new address may affect whether you are still a Scottish taxpayer or not.
  • The income tax change will be applied through PAYE (Pay As You Earn) for both employees and pensioners and in this case, you do not need to do anything further, as HMRC will advise employers to treat you as a Scottish taxpayer and apply the Scottish Rate of Income Tax.
  • If you complete a Self-Assessment tax return, you will be asked to confirm whether you are a Scottish taxpayer in the 2016 to 2017 return.

HMRC are responsible for identifying employees who will pay the Scottish Rate of Income Tax and deciding what tax they must pay. Employers and pension providers will only use a Scottish tax code if HMRC tells them to, but if you change your address, you will still need to inform HMRC yourself.

A list of Scottish Rate of Income Tax taxpayers and tax codes will be sent out to employers before April 2016 and employers will be responsible for deducting your income tax at the correct rates, but there is no change to how they report or make payments for income tax to HMRC.

How can we help?

Changes in taxation are frequent and with more powers given to the Scottish Government after the general election, there are likely to be more in the pipeline moving forward. We will as always do our best to keep you informed of what is happening, but if you have any questions now or after the new Scottish Income Tax Rate has been announced or if you receive a letter from HMRC, please give us a call and we will be happy to talk this through with you.

The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. Tax advice is not regulated by the Financial Conduct Authority. This article represents our interpretation of current and proposed legislation and HMRC practice as at the date of publication. These may change in the future.

Angus Kirk

Financial Planner at Bridge Investments
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