Scottish Residence Tax Rules

People living in Scotland will soon pay part of their income tax to the Scottish government, a move that could result in them paying a different rate of tax from other UK residents.

The main UK income tax rates for Scottish residents will be reduced by 10p from 6 April 2016. The Scottish Parliament will then set the Scottish rate of income tax to be paid on top of the UK rate. For 2016/17 the Scottish government has proposed a rate of 10p, in which case people in Scotland will pay the same rates as the rest of the UK. However, if in future, the Scottish rate is set at 11p, for example, Scottish taxpayers will pay 21% (10% + 11%) basic rate, 41% (30% + 11%) higher rate and 46% (35% + 11%) additional rate tax. Similarly, with a 9p Scottish rate, the combined rates would be 19%, 39% and 44%.

The Scottish rate will not apply to savings income, such as bank interest, dividends, which will continue to be taxed at the UK rates. It will not affect income tax allowances and thresholds.

Whether you are subject to the Scottish rate will normally depend on where you live. It will make no difference where you work or where your employer is based. For people with just one home this is straightforward, but if you have homes in Scotland and elsewhere in the UK, or if you move in or out of Scotland during the year, it will normally be your main residence that determines whether you are a Scottish taxpayer. If you cannot identify your main residence, you will be a Scottish taxpayer if you spend more days in Scotland than elsewhere in the UK. Days outside the UK are ignored. Your Scottish residence status can change from one tax year to the next, but it will not alter during the year. Only people who are UK resident in the first place can be Scottish taxpayers.

From 2016/17 Scottish employees will have a tax code prefixed by an ‘S’ so that employers can deduct the correct amount of tax.

HM Revenue & Customs (HMRC) will identify Scottish employees from their address and so it is important that they tell HMRC if they move home.

We can advise if you are not sure whether you or a family member qualify as a Scottish resident or on how the Scottish rates will affect you so please get in touch.