Steven Cameron: How might the Scottish rate of income tax affect you?

From April, the Scottish Parliament has new powers that may affect the amount of income tax Scottish taxpayers will pay.

Steven Cameron, regulatory strategy director at Aegon
Steven Cameron, regulatory strategy director at Aegon

You’ll be a Scottish taxpayer if your sole or main residence is in Scotland for all or most of the tax year, even if you work in another part of the UK. For some people, it may not be obvious, so HM Revenue & Customs (HMRC) guidance on Scottish taxpayer status includes a number of examples.

If you’re an employer anywhere in the UK with at least one employee who’s a Scottish taxpayer, you’ll need to consider payroll and pension implications.

HMRC will shortly write to those people it believes are subject to the Scottish rate. If you don’t receive a letter but think you should have, contact them. Then, by April, HMRC will issue new PAYE tax codes to employers and pension providers with those subject to the Scottish rate having an “S” prefix.

How will it work?

Scottish taxpayers will pay income tax to both the UK and Scottish governments, collected jointly by HMRC from April. UK income tax for Scottish taxpayers will be ten percentage points lower than the full UK rates, so 10 per cent for basic rate taxpayers and 30 per cent for higher rate taxpayers. But they’ll also pay whatever Scottish rate the Scottish Government sets. If that’s initially 10 per cent, there will be no effect on take-home pay. If, however, it’s set higher or lower, then take-home pay will be affected and the Scottish Government will have more or less to spend. There’s a Scottish rate of income tax calculator available on the Scottish Parliament website.

What will it apply to?

If you’re a Scottish taxpayer, you’ll pay the Scottish rate on employment income, whether employed in Scotland or elsewhere in the UK. You’ll also pay it on any rental or pension income, but not on savings or dividend income where full UK rates will still apply.

What does this mean for pensions?

The change will affect how much tax Scottish taxpayers pay on pension income, including any from annuities or “income drawdown” products. It will also affect tax relief on personal contributions to any pension, which will also be at the total rate of tax paid, UK and Scottish combined. So if the total rate in Scotland is higher, Scottish taxpayers will be entitled to more relief on pension contributions.

Looking further ahead

The tax-raising powers of the Scottish Parliament are to be extended further. From April, the same Scottish rate will apply across all Scottish taxpayers but proposals going through the UK parliament could mean in future, there are different “earnings bands” on which you pay the basic and higher rates of tax and also different rates within these bands. This could mean a different step up between the basic and higher rates.

In addition, the UK government is considering changing the whole approach to pension tax relief and it could decide to move away from granting relief based on the “marginal” rate of income tax you’re paying. We expect any change here would also apply to Scottish taxpayers.

What do I need to do?

Whether or not you’re a Scottish taxpayer, there’s no need for you to take any action. The changes will be handled between HMRC, the UK and Scottish governments and your employer or pension provider. We should hear soon what tax rate the Scottish Government decides on.

• Steven Cameron is regulatory strategy director at Aegon