What is the Scottish Rate of Income Tax?

The Scottish Rate of Income Tax or SRIT, born out of The Scotland Act, 2012 is the successor to the Scottish Variable Rate or SVR. Announced on 16th December 2015, the SRIT rate, which came into effect from 6th April of this year is 10% for the current tax year.

Set by the Scottish Parliament, SRIT gives Scotland the autonomy to set its own rate of income tax. That said, this tax will still be collected and managed by HM Revenue & Customs and because of this, the SRIT remains part of the overall UK income tax system and is not considered a devolved tax. It is therefore, extremely relevant to anyone running a UK payroll and for payroll bureaus such as Payplus.

How it works

In effect, the Scottish Rate of Income Tax is a rate that is set by the Scottish Parliament. The rate can be a half or full percentage point at any rate over zero, but the rate set must be applied across all tax bands equally. What this means to Scottish taxpayers is that, no matter whether they are basic, higher or additional rate taxpayers’ rates, their rate will be reduced by 10% or 10p in the pound and then the rate that has been set by the Scottish Parliament will be added. Because the rate for 2016 has been set at 10%, this means that in the current tax year there will be neither a negative nor a positive effect of this change. In other words, Scottish taxpayers will pay the same amount of tax as any other UK taxpayer.

A handy SRIT calculator can be found here.

Who SRIT applies to

The Scottish Rate of Income Tax applies to Scottish taxpayers only. It was and will continue to be the responsibility of HMRC to determine whether or not taxpayers qualify as Scottish or not. That decision will be based on taxpayers’ main place of residence. HMRC make their decisions on which taxpayers are considered to be Scottish taxpayers and they are informed in writing, which means that no action is required on the taxpayers part.

SRIT in the future

Many would say that Scottish Rate of Income Tax has had a somewhat ‘soft landing’ because in its introductory phase it means that taxpayers were neither better nor worse off; but the powers of the Scottish Parliament will be seen to expand as a result of The Scotland Act 2016.

As things stand at the moment, the Scottish Parliament only has the right to vary rates by an equal amount payable on earned income across all tax bands, but The Scotland Act 2016 provides them with the power to set rates and band thresholds that will apply across all non-savings and non-dividend income paid by Scottish taxpayers. This will come into effect from the start of the 2017/2018 tax year. They will not however have the power to change personal allowances.

The First Minister and the Deputy First Minister announced on 22nd March this year that they proposed using their powers more widely, so more significant implications could well be on the horizon for Scottish taxpayers. A summary of these proposals can be found here.

Practical implications

With an estimated 2.2 million Scottish taxpayers, the practical implications of these changes go beyond simply making sure that everyone is paying the right rate of tax.

With Scottish taxpayers identified and notified, HMRC issues Scottish tax codes (this was first done in February 2016). Scottish tax codes are prefixed with an S. It is this coding that will highlight to payroll processing systems that an employee is to be treated under the Scottish taxation system.

For the moment, Scottish emergency codes don’t exist and new starters will be deemed to belong to ‘rest of the UK’ until such time as HMRC says otherwise. Conversion from ‘rest of UK’ to Scottish tax codes is also relatively simple. In a situation where the code is cumulative, the payroll system will convert any tax paid already into what would be due under SRIT. In a non-cumulative situation, HMRC will carry out a year-end reconciliation. Payments after leaving are calculated using the tax code S0T.

When it comes to PAYE settlement agreements and pension contributions, things become a little more complex, with two agreements being needed for the former and the latter depending on whether a net pay arrangement scheme is in place or a relief at source scheme.

As you can see, it is helpful all round that for this first year, the net effect of the SRIT is zero, however, it is also clear, that this split system has the potential to cause payroll niggles and issues when rates start to differ. If you have Scottish taxpayers on your payroll and want to make sure you’re doing all the right things at the right times, why not get in touch?