The tale of two tax systems: How Scottish and English income tax rates differ

The United Kingdom comprises four constituent countries, England, Scotland, Wales, and Northern Ireland, but the way people’s income is taxed is different, writes Malik Founder and Managing Director of Tax Accountant: a Specialist Tax Consultancy
Did you know income is taxed differently in Scotland to the rest of the UK? Picture AdobeDid you know income is taxed differently in Scotland to the rest of the UK? Picture Adobe
Did you know income is taxed differently in Scotland to the rest of the UK? Picture Adobe

While the UK has a unified tax system in many respects, income tax rates diverged between Scotland and the rest of the UK starting in 2017. We have explored how the Scottish income tax works compared to the system in England, who pays Scottish income tax, how tax on foreign income is affected and the key differences taxpayers should know.

What is Scottish income tax?

In 2016, the Scottish Parliament was granted the power to set different income tax rates and bands from the rest of the UK. This is known as the devolution of income tax powers. The first Scottish income tax rates were enacted on April 6, 2017.

Previously, all individual taxpayers in the UK paid the same UK income tax rates regardless of where in the country they lived. Now Scottish residents pay Scottish income tax on their earnings, while residents of England, Wales and Northern Ireland continue to pay the same UK income tax rates set by the UK government.

The Scottish government can determine the tax bands – the income thresholds at which tax rates change – and the tax rates themselves. They can decide whether to increase or decrease income tax for Scottish taxpayers relative to the rest of the UK.

Who pays Scottish income tax?

Scottish income tax applies to what are termed "Scottish taxpayers". The criteria for determining who is a Scottish taxpayer are:

  • The individual must be a UK resident for tax purposes.
  • They must meet one of the following:
  • Have a "close connection" to Scotland, such as a place of residence there.
  • Spend more days in Scotland than in other parts of the UK.

In most cases, taxpayers who live in Scotland will be Scottish taxpayers. Having a Scottish birthplace or identity does not make someone a Scottish taxpayer – it is based on residence and connections. Depending on how much time they spend in each location, people who move between Scotland and other parts of the UK during a tax year can also qualify as Scottish taxpayers.

The important point is that Scottish income tax applies to your worldwide income if you are a Scottish taxpayer, except for savings and dividends, which remain UK-wide. The normal UK tax rules regarding residence and domicile status still apply. So, if you are non-UK domiciled and only a UK resident, claiming remittance basis, you will be subject to Scottish income tax rates while residing in Scotland. If you need advice about tax on arising basis or remittance basis, it is always beneficial to consult a UK tax advisor who specialise in the subject.

Differences from English income tax

While controlled by the Scottish Parliament, Scottish income tax remains part of the UK tax system. It differs from English income tax in the following ways:

Tax rates: Scotland has the power to set different tax rates. For 2023/24, the Scottish basic rate is 21%, compared to 20% in England. The higher rate threshold also starts at a lower income level.

Tax bands: Scotland can set different band thresholds from England as well as rates. Scotland's 2023/24 starter rate and basic rate band are wider.

Tax codes: Scottish taxpayers have a special PAYE tax code prefix "S" (e.g., S1257L). English taxpayers have a number.

Self-assessment: Scottish taxpayers tick a separate box to indicate this on self-assessment forms.

Income tax reliefs: Most reliefs remain UK-wide, but the Personal Allowance starts to be withdrawn earlier in Scotland.

Income taxed: Scottish income tax applies to full UK-wide income, except savings and dividend income.

Administration: HMRC still administers Scottish income tax alongside UK income tax.

So while Scottish Parliament decides the rates and bands, HMRC handles the collection and management of the tax. One combined Self-Assessment return or PAYE system covers both Scottish and UK income tax an individual pays.

In most circumstances, taxpayers normally pay all their income tax to HMRC. HMRC then apportions the tax to the Scottish and UK governments based on the taxpayer's status and income sources. But pension providers in Scotland deduct Scottish income tax from occupational or personal pensions under PAYE before paying them.

Key differences in practice

Here are some of the key differences Scottish taxpayers may notice compared to England:

  • A PAYE code starting with S
  • Paying more tax on earned income between £12,571-£50,270.
  • Paying 21% basic rate rather than 20%
  • Higher rate of 41% on income above £43,663 rather than £50,271
  • Personal Allowance withdrawn at £123,700 of income rather than £125,140.
  • Tick box on Self-Assessment to indicate Scottish taxpayer status.

So how does it work?

While seemingly complex, the Scottish income tax operates seamlessly alongside the UK income tax for most people. Some key aspects of how it works are:

  • HMRC collects all income tax through PAYE and Self-Assessment as normal.
  • Tax codes identify Scottish taxpayers (S prefix)
  • HMRC apportions tax revenues between Scotland and UK
  • Most income tax reliefs and allowances apply UK-wide.
  • Pension providers deduct Scottish tax rates at source from pensions.
  • Self-employed complete one SA return but tick the Scottish box.
  • Employers deduct Scottish income tax rates if the employee is a Scottish taxpayer.
  • Individuals pay tax based on residency and connections, not nationality.

Scottish income tax integrates within the unified UK tax system rather than operating as an entirely separate tax. For Scottish taxpayers, the main difference is paying more tax on earned income in certain bands. But the administration remains essentially the same as elsewhere in the UK.

Why income tax was devolved

The Scotland Act 2012 first legislated plans to devolve some income tax powers. The Scotland Act 2016 then went further by giving Holyrood full control over income tax rates and bands. The Scottish government wanted more fiscal autonomy than relying on a block grant from the UK. Setting their income tax allows them to fund their spending plans directly.

Having different rates also lets Scotland increase or decrease taxes to suit their policy priorities and vision for the country. For example, they keep university tuition free while public services are under pressure.

The Scottish government's budget relies much more heavily on income tax than the UK budget – over 50% compared to around 30% for the UK. So income tax rates significantly impact their available funding.

Unanswered questions

  • While the basics of Scottish income tax are now established, uncertainties remain around how it might evolve:
  • Will tax rates continue to diverge between Scotland and England?
  • Will the differences create tax competition between the countries?
  • How will Scottish income tax policy vary between political parties?
  • Will further devolution take place in the coming years?
  • Could administrative difficulties emerge in future?

For now, Scottish, and English income tax rates remain broadly aligned overall. But this tale of two tax systems may have many more chapters.

Mr Aatif Malik is Founder and Managing Director of Tax Accountant and brings over 20 years of experience advising clients on complex tax affairs. Mr. Malik's extensive knowledge spans personal tax, corporate tax, international tax, and tax disputes. For more information, visit this link.