This is an updated blog to reflect changes announced in the Chancellor’s Autumn Statement speech made on 22 November 2017.
Scottish taxpayers earning more than £43,000 pa, are already paying £400 more tax pa, because Holyrood flexed its tax powers for the first time last year, and froze the basic rate tax band at £43,000, despite this rising to £45,000 in the rest of the UK. The 2017 Autumn budget, has also just confirmed that the rest of the UK will benefit from an additional £1,000 increase in the basic rate band from 2018/19. If the Scottish government do nothing to increase the basic rate band, it will mean some taxpayers in Scotland could be paying £600 more tax that their counterparts in the rest of the UK.
With MSP’s recently voting in favour of income tax rises, and Nicola Sturgeon confirming she is now open to the prospect of tax increases in order to offset the impact of ongoing austerity, it seems increasing likely that Scottish Taxpayers are facing tax rises in comparison to their English counterparts. Philip Hammond has now been seen to hand the Scottish Government an extra £2 billion in his budget, and given there is some controversy as to how this will actually be paid, it remains to be seen if the Scottish budget, due to be announced by Derek McKay on 14th December, will outline any proposed tax changes. From our perspective, it’s very much ‘watch this space’.
In the interim, it’s perhaps worth reminding ourselves just what the current Scottish tax actually is, and when individuals would need to pay it.
The ‘Scottish Rate of Income Tax’ is payable on wages, pension and other earned income. It cannot apply to investment income such as interest or dividends, which will continue to be taxed at UK tax rates, with the same UK tax bands. Right now, individuals pay exactly the same rates of income tax as the rest of the UK, however 10% of tax collected is paid to the Scottish Government.
Individuals must be Scottish Tax Resident to pay the Scottish Rate of Income Tax. This definition is widely drawn by HMRC, but you must firstly establish UK tax residence, before then establishing Scottish Tax Residence. The tests associated with UK tax Residence definitions are difficult enough, so this adds yet another layer of complexity, especially for those who are required to travel to carry out employment duties, and/or live overseas for some period of time.
Generally if you have one home (either owned or rented) and that is located in Scotland, then HMRC will consider you resident here for tax purposes. If there are two homes available in the UK at the same time, one being outside of Scotland, then it would need to be decided which is your main home, and this may not necessarily be where you spend most of your time. Factors such as the location of your family and possessions, club memberships and where you are registered for your driving license, car insurance and bank accounts will be considered. If you have several homes across the UK, or perhaps no home at all, then counting the days you have spent in Scotland compared to days spent elsewhere, would then determine the residence position.
The complexities generated by the introduction of Scottish taxes and the definition of UK/Scottish taxpayer should not be underestimated, but up to this point, the potential difference in exposure to Income tax has been relatively small. If Hollyrood do decide to increase tax in Scotland, then establishing the correct residence position will inevitably become more important, and we are perfectly placed to provide the necessary clarity.