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Scottish Income Tax confirmed by fiscal settlement

February 24, 2016


After lengthy negotiations the UK and Scottish Governments announced yesterday they have reached agreement on a new fiscal framework devolving significant new powers of tax and welfare to Scotland. From April 2017 the Scottish Government will have the power to set its own independent rates for income tax.

The Scottish Rate of Income Tax (SRIT) begins from April 2016, using new tax codes prefixed identified by an S at the start of the code, for example S1100L or SK100. When someone joins an employer they default to being treated as a “rest of UK” taxpayer, unless and until HMRC notifies the employer otherwise – there is no Scottish emergency tax code.

Under the limited devolved tax powers by which the introduction of SRIT was provided for the bands of SRIT are locked together. This means that to increase the higher 40p rate of income tax, Holyrood would also and automatically be required to increase the lower rate of 20p.

The Scottish Government announced on 16 December last year that it would leave SRIT unchanged in its first year of operation. SRIT will be the same as Income Tax rates in the rest of the UK for the period April 2016 to April 2017.

However, the new fiscal settlement gives Holyrood the power to set different higher and lower tax rates as it decides from April 2017. It would for example be free to decrease the lower rate of tax or leave it unchanged but increase the higher rate of tax for Scottish taxpayers.

These new tax powers create the possibility for tax competition in the UK, with workers migrating north or south in response to the tax differentials that may arise between England and Scotland from April 2017. For example, Scotland might reduce the lower rate of tax to attract new workers to Scotland but increase the higher rate of tax causing the higher paid to move south to England in response.

The SNP have given strong indications of their willingness to pursue a ‘progressive’ tax policy requiring the higher paid to pay more tax.

The designation of a Scottish taxpayer which is based on residential address not place of work was announced by HMRC by letter in December when it wrote to 2.2m taxpayers identified as resident in Scotland and therefore subject to the SRIT. HMRC compiled its list of SRIT taxpayers based on address data taken from RTI submissions and checking them against other sources of address information, such as Royal Mail’s own data.

Kate Upcraft, the payroll taxes expert, writing in AccountingWEB explained “HMRC only used to get a change of address from employers that would be used to update the taxpayer’s record when someone changed jobs. Since April it now gets updated records every time the employer sends an address that they haven’t received before.”

Kate Upcraft explained that HMRC’s access to correct taxpayer address information is dependent on the way employer’s individual payroll software is programmed to handle address data in the RTI FPS, and manage the new requirement automatically to notify a change of address to HMRC: “If your FPS is as big as say Asda’s then it’s not likely your software can send every employee’s address every time a submission is sent to HMRC; it would simply make the file enormous. So it depends on what your software developer has chosen to do since HMRC switched from the annual April address update. Secondly the address supplied by employers may not be the correspondence address taxpayers want HMRC to use: you might be a student with a temporary address or a secondee using a care of address.”

The rules governing residency for SRIT are complex. SRIT looks likely to create additional challenges for employers and employees. If and when the UK and Scottish rates of income tax diverge, an incorrect designation with a SRIT tax code threatens significant difficulties for both employers and employees.

HMRC’s letter to those designated Scottish taxpayers gives no address or contact telephone number for those wishing to query their status as a Scottish taxpayer.

The payment of Universal Credit remains continues to be reserved to the UK Government. The Scottish Government may vary some aspects of Universal Credit’s operation in Scotland including the frequency of payments and the value and payment of the housing benefit element.

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