The Scottish Rate of Income Tax (SRIT) is almost a reality, with John Swinney, Cabinet Secretary for Finance, Employment and Sustainable Growth in the Scottish Government set to announce a rate in his Budget next week (the 16th).
Plus, HMRC commenced writing on 02 December to people that they have identified as Scottish Taxpayers who will be impacted by the SRIT. Scottish Taxpayer status is dependent on being a UK taxpayer and, for the majority, is dependent on having a close or closer connection to Scotland rather than any other part of the UK. HMRC’s letter contains the words:
‘Our records show that you are a UK taxpayer and your main residence is in Scotland. This means that the new Scottish Rate of Income Tax will apply to you’
It goes on to explain that the Scottish Budget will detail the SRIT rate, that tax codes will be prefixed ‘S’ and their rate of tax ‘may’ be affected as a result. Whilst the letter contains some useful links for more information, it is inevitable that a lot of people will, approach the payroll or HR departments in the first instance. Therefore, it is useful that we have the same information and, importantly, are able to point our employees to this. We should not be giving out any taxation advice to our employees, though it is responsible to be able to point them in the right direction.
So, in advance of the queries, here are some of the questions that might be asked and some links for you to add to your favourites:
What is SRIT?
This is a new taxation regime brought to us courtesy of amendments to the Scotland Act 1998 made by the Scotland Act 2012. John Swinney will set a Resolution’ in his Budget that will determine the rate of Income Tax that is paid by ‘Scottish Taxpayers’ for the following tax year (on non-savings and non-dividend taxable income). The rate can be set as a whole of half number. Then, the ‘Rest of the UK’ (rUK) rates will be reduced by 10 percentage points and the SRIT added back on. For example, a rate of 9.5 is set, the rates of tax for Scottish Taxpayers will be calculated as follows:
- Basic = 20 less 10 + 9.5 = 19.5%
- Higher = 40 – 10 + 9.5 = 39.5%
- Additional = 45 – 10 + 9.5 = 44.5%
Gov.uk gives an outline of the scheme on its page ‘Scottish Rate of Income Tax‘.
What is a Scottish Taxpayer?
A Scottish Taxpayer is, first and foremost, a UK taxpayer. Then, to qualify to be a Scottish one, HMRC go through 4 questions:
- Is the individual a Scottish Parliamentarian? These individuals will always be Scottish Taxpayers, regards of the residence questions below
- Does the individual have a close connection to Scotland in terms of their permanent residence?
- Does the individual have a closer connection to Scotland than any other part of the UK when time spent in other parts of the UK is looked at individually?
- Where the individual is not a Scottish Parliamentarian and does not have a close or closer connection to Scotland, are the days spent in Scotland greater than the days spent in other parts of the UK when looked at cumulatively?
The best guidance that I have found is the ‘Technical Guidance on Scottish Taxpayer Status‘ on Gov.uk. It is a long document but it is quite comprehensive. If the employee wants to speak to HMRC, wish them luck and give them the telephone number for general enquiries, which is 0300 200 3300!
I haven’t got a letter, what does this mean?
If the employee is clearly not a Scottish Taxpayer, they are unaffected by the new taxation regime from 2016/17 tax year and there is no cause for concern. They will continue to pay Income Tax at the ‘rest of the UK’ rates.
If they believe that they do meet the criteria for being a Scottish Taxpayer, the probability is that HMRC do not hold their up-to-date residence address. They may hold a correspondence address, which is a totally different thing. The residence address is the one that is held on HMRC’s main computer system whilst the correspondence address is one held elsewhere. HMRC’s main computer system is only definitely updated by employers for new starters when their first FPS is sent. Any subsequent address changes may not update this but will update the correspondence address. Employees have a responsibility for updating their main address held at HMRC and we need to be pointing employees to the link where they can do this online via the ‘Tell HMRC about a change to your personal details‘ page on Gov.uk.
It is very important that we let all employees know that this is the only way that they can be sure that HMRC have their current address. So, when we are advised that an employee has moved, we should also be asking them to tell HMRC the same information. The FPS may send the revised address but it will not necessarily update HMRC’s main computer database.
How will this affect my tax?
In financial terms, the impact on the Income Tax calculation very much depends on the SRIT rate that is set for 2016/17. If it is set at 10%, there will be no financial impact. However, the Scottish Taxpayer will still have a S prefix tax code and it is still vital that the employee follows the above process for advising HMRC of changes of address.
If the SRIT rate is anything other than 10%, this will have a financial impact on the employee. The obvious question that will be asked is how the SRIT will affect net income. For the payroll professional, this may mean making a comparison between the ‘rest of the UK’ tax tables and the SRIT tax tables, though these are not due to be on Gov.UK as ‘Payroll Publications for Employers‘ until early February 2016. Keep this link until that time.
Therefore, employers would be well-advised to point employees to the SRIT Calculator on the Gov.scot Website. I have used this and it is a fascinating comparison tool. The word of caution here is that, at the time of writing, it is not working, nor does it allow you to enter a rate in anything other than a whole number! There is also a good factsheet entitled ’How Income Tax revenue will change in Scotland‘ on the Gov.scot Website.
I think that the best and most comprehensive guidance is the Gov.uk news story from 15 September 2015. This has links to all of the above plus a lot on how SRIT affects payroll administration. Also, there is a long document entitled ‘The Scottish Rate of Income Tax and Additional Rate taxpayers‘ on the Gov.scot Website. This is dated February 2014 and is, therefore, out of date with a lot of figures. However, it is not only about people paying at the Additional Rate and does make for an interesting read into the history of devolution of Income Tax to Scotland.
SRIT is going to be a big change for payroll professionals and confusion is likely to be great, regardless of the communication campaign that HMRC plans to undertake later in the year and in early 2016. Therefore, it is nice to be prepared and be able to nicely tell our employees where to go (for information).