HMRC Clarifies Scottish Income Tax Changes

By Editorial 10 April, 2013

The UK tax authority, HM Revenue and Customs (HMRC) has released new guidance on the implications of the Scotland Act 2012, which will allow the Scottish Government - for the first time in 300 years - to set its own rate of income tax.

The Scotland Act 2012, which grants Scotland fiscal autonomy from the UK, is expected to enter into force from April 1, 2016. From this date, Scotland will be allowed to set its own rate of personal income tax, which will be charged on the non-savings income of those defined as Scottish taxpayers. The rate paid by Scottish taxpayers will be calculated by reducing the basic, higher and additional rates of income tax levied by the UK Government by 10% and adding a new Scottish rate set by the Scottish parliament.

Theoretically, this will allow Scotland to offer income tax rates as low as 10% (down from the UK's 20% rate), 30% (down from 40%), and 35% (down from 45%). Pension income will be treated the same way as income from employment, but savings income and dividend income received by Scottish taxpayers will continue to be taxed at the appropriate UK rate.

In anticipation of the change, all Scottish taxpayers in Pay as you Earn (PAYE) will get a tax code that begins with S. Tax codes for the 2016-17 tax year will be issued in January or February 2016, and employers across the UK will be required to upgrade their systems to cope with the new rules, HMRC has announced.

HMRC has clarified the proposed tests for determining Scottish tax residence. In order for an individual's situation to be considered, the individual must be UK resident for tax purposes.

In general, individuals predominantly residing in Scotland will be deemed to be Scottish taxpayers after the change. In addition, if the person has one place of residence and this is in Scotland, the individual will be deemed to be a Scottish taxpayer.

Individuals who have more than one place of residence in the UK must determine which of these has been their main place of residence for the longest period in a tax year - if this is in Scotland, they are a Scottish taxpayer. Individuals who cannot identify a main place of residence will need to count the days they spend in Scotland and elsewhere in the UK to identify their main place of residence.

HMRC has said further guidance will be published prior to the introduction of the Scottish rate to assist taxpayers in identifying whether they will be subject to Scottish rates.

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