Scottish Tax Reduction for UK Armed Force Personnel

27 July 2018

Compensation because they simply have no choice of where they are posted equals another interesting development in terms of English v Scottish taxes

Armed forces personnel pay UK income tax on their military earnings irrespective of where they are required to serve, or for how long.

The usual HMRC Statutory Residence Tests and Double Tax Treaties are ignored for the purposes of this income, meaning some could be posted overseas for significant periods of time, but still remain subject to UK tax.

This was all very simple, that is until tax rates changed within the UK tax system, so when Scotland decided to change its rates of tax on earnings, it resulted in military personnel based on Scotland, then being subject to a different ‘Scottish’ rates of UK tax.

Depending on the level of pay received, and the application of Derek MacKay’s new ‘progressive tax system’ in Scotland, with 5 tax bands (19%/20%/21% /41% and 46%) compared to 3 tax bands in England (20%/40% and 45%), there were tax winners, but also definite losers, and so, after a period of lobbying (particularly by those Armed forces based in the North East of Scotland), the UK Government have agreed to compensate those who would have been out of pocket, to effectively bring their tax position back to what it would be assuming they were paying English tax. The detail of how this compensation will be issued for 2018/19, and if this position will continue to be applied over the longer term isn’t yet clear.

It is worth pointing out that for all other income and gains, these Scottish tax resident personnel will have to pay tax according to Scottish tax legislation, so for example rental income will remain subject to Scottish tax, which will inevitably lead to reporting complexities for those involved.

Given the level of sacrifice these individuals make for the country, there is definitely an argument to suggest they should all be paid equally across the UK for the work they do, but there is no doubt that this story has highlighted the impact and subsequent complexities connected to changes in the UK tax system as a whole.

Those who can choose to work anywhere in the UK, may view this Government decision with increased interest.

We are perfectly placed to help you negotiate Scottish tax challenges. If you would like to explore tax mitigation strategies, and challenge us to see if we can narrow the broadening UK/Scottish tax gap for you, please contact Lynn Gracie ( or your usual AAB contact.

To find out more about Lynn and our Private Client Tax Team, click here

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