The Scotland Act 2016 devolved more powers to the Scottish Government and on 15 December, Finance Secretary Derek Mackay delivered the 2017/18 Scottish Draft Budget setting out the Scottish Government’s financial and tax plans.
This article highlights the Government’s proposals from April 2017 and also details the current tax position in Scotland.
Income tax for Scottish taxpayers The Scottish Rate of Income Tax (SRIT)
On 6 April 2016, a fundamental change was made to the taxation system for Scottish resident individuals. The main UK rates of income tax were reduced by 10p for Scottish taxpayers and in its place the SRIT was applied equally to all Scottish taxpayers. As the SRIT was set at 10p, the overall income tax rates are currently the same as in the rest of the UK. So, those who are resident in Scotland are currently liable to two types of income tax and pay SRIT at 10% on most mainstream sources of income such as PAYE income, pensions, rental profit and profits from self-employment.
The SRIT does not apply to income from savings such as building society interest or dividends. These rates are the same for all taxpayers across the UK.
Gift Aid donations and relief at source on personal pension contributions continue to apply at the UK basic rate (20%), regardless of the tax position of the donor. Scottish taxpayers are able to claim relief equal to the difference between the Scottish basic and higher or additional rates.
The SRIT was in place for one transitional year and will no longer apply from 6 April 2017 as the Scottish Government have exercised their powers to set the tax rates and bands (excluding the personal allowance) on non-savings, non-dividend income of Scottish taxpayers.
2017/18 tax bands and rates
The Scottish Government is proposing to freeze the Scottish basic rate of income tax at 20% and also to freeze the Scottish higher and Scottish additional rates at 40% and 45% respectively. In addition, the higher rate income tax threshold will increase by inflation to £43,430 in 2017/18. The additional rate of tax of 45% remains payable on taxable income above £150,000. The Scottish Government also confirmed that the higher rate income tax threshold will increase by a maximum of inflation in all future years of this Parliament.
The Scottish Government has therefore not followed the UK Government’s plans to extend the threshold for paying the higher rate level of income tax of 40p from £43,000 to £45,000 for 2017/18. This means that a Scottish higher rate taxpayer will pay £314 more tax in 2017/18 than a UK higher rate taxpayer, being £1,570 at the marginal rate of 20% being (40% – 20%).
Personal allowance for Scottish and other UK taxpayers
The personal allowance is currently £11,000. Legislation has already been enacted to increase the allowance to £11,500 for 2017/18.
The personal allowance is available to Scottish and other UK taxpayers, however, not everyone has the benefit of the full personal allowance. There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000, which is £1 for every £2 of income above £100,000. So for 2016/17 there is no personal allowance where adjusted net income exceeds £122,000. For 2017/18 there will be no personal allowance available where adjusted net income exceeds £123,000.
Income tax bands across the rest of the UK
The UK basic rate of tax is currently 20%. The band of income taxable at this rate is £32,000 so that the threshold at which the 40% band applies is £43,000 for those who are entitled to the full personal allowance.
UK legislation has already been enacted to increase the basic rate band to £33,500 for 2017/18. The higher rate threshold will therefore rise to £45,000 in 2017/18 for those entitled to the full personal allowance.
The additional rate of tax of 45% remains payable on taxable income above £150,000.
Who pays Scottish income tax?
Broadly, a Scottish taxpayer is someone who is UK resident for tax purposes and has one place of residence which is in Scotland.
Individuals who have more than one place of residence in the UK need to determine which of these has been their main place of residence for the longest period in a tax year. Individuals who cannot identify a main place of residence will need to count the days they spend in Scotland and elsewhere in the UK. If they spend more days in Scotland, they will be a Scottish taxpayer. Further guidance on determining whether or not you are a Scottish taxpayer is set out in the appendix to this letter.
Employers should be aware that if an employee is classed as a Scottish taxpayer then a special PAYE code (S) will apply and this will be notified to employers and pension providers by HMRC where appropriate.
An employer does not have to make any assessments on taxpayer status. Employers should not change a tax code unless advised to do so by HMRC. Employers of Scottish taxpayers will need to ensure their payroll software has the capability to deal with S codes.
HMRC’s Employer Bulletin for December 2016 asks that employers remind their employees of the importance of keeping HMRC informed of their correct address details as this information is crucial in determining whether or not they are a Scottish taxpayer. Taxpayers can check and update their address details through their online Personal Tax Account. For those individuals who have not yet used their account they can register at www.gov.uk/personal-tax-account.
Land and Buildings Transaction Tax
Land and Buildings Transaction Tax (LBTT) replaced UK Stamp Duty Land Tax in Scotland from 1 April 2015. LBTT is a tax applied to residential and commercial land and buildings transactions (including commercial leases) where a chargeable interest is acquired. The Additional Dwelling Supplement (ADS) was introduced from 1 April 2016 and is payable on purchases of additional residential properties, such as buy to let properties and second homes.
In 2017/18 the Scottish Government will maintain the LBTT and ADS rates at the same level as in 2016/17. Further details on the operation of LBTT and ADS is provided in the appendix to this letter.
Air Passenger Duty
The Scottish Government has been given new powers in other areas including provision for a tax to replace Air Passenger Duty (APD) in Scotland.
The Government have confirmed that they will introduce a Bill in the first year of the current Parliament to establish the tax which will replace APD in Scotland from 1 April 2018.
The Scottish Parliament have confirmed that they are committed to delivering a 50% reduction in the overall tax burden of APD by the end of this Parliament.
If you would like further details on how the Scottish tax rules will affect you please contact us.