How will the Scottish Rate of Income Tax affect you?

Back to results

The UK Government delivered its Autumn Statement recently and now the focus turns to the Scottish Parliament and its Budget Statement.  On 16 December 2015 we expect the Scottish Parliament to set the Scottish Rate of Income Tax (SRIT) for the first time. This change could have a significant impact on the number of pounds that end up in your pocket from April next year, so it’s worth taking the time to find out what’s changing.

The SRIT provisions(Opens new window) were included in  the Scotland Act 2012 and will come into force from 6 April 2016. 

SRIT will apply to your income from employment/self employment, as well as your pension and rental income. It won’t apply to your savings or dividend income which will continue to be taxed at UK rates. 

So let’s look at how it works and who’s affected.

SRIT at a glance 

At the moment UK taxpayers are all subject to the same levels of income tax no matter where they live in the UK. The basic rate is charged at 20%, the higher rate is charged at 40% and the additional rate is charged at 45%. 

From 6 April next year Scottish taxpayers will see these UK rates fall to 10%, 30% and 35% on their employment, pension and rental income. But in addition to these reduced rates Scottish taxpayers will also have to pay the SRIT, as set by the Scottish Parliament. 

The personal allowance and the existing tax bands won’t be impacted by these changes.

Depending on the SRIT, taxpayers resident in Scotland could end up paying more, less or just the same as those in the rest of the UK. The Scottish Parliament can only set one rate to apply to the basic, higher and additional rate tax bands. It can’t set one rate to apply for basic rate tax and another for higher rate tax or additional rate tax.

The table below shows how the new system would work in practice. 

  Scottish basic rate Scottish higher rate Scottish additional rate
SRIT at 9% UK 10% + 9% = 19% UK 30% + 9% = 39% UK 35% + 9% = 44%
SRIT at 10% UK 10% + 10% = 20% UK 30% + 10% = 40% UK 35% + 10% = 45%
SRIT at 11% UK 10% + 11% = 21% UK 30% + 11% = 41% UK 35% + 11% = 46%

Who’s affected?

If you’re classed as a Scottish taxpayer then the SRIT will affect you. To be a Scottish taxpayer you must first be a UK resident for tax purposes. Thereafter the defining factor is residency rather than nationality, where you work or where your pension provider is based. And so if your sole or main residence is in Scotland then you’re likely to fall under the new rules.  

If you’re in any doubt then further details and specific examples are set out here(Opens new window).

HMRC will have responsibility for determining your status and from 2 December 2015 it’ll be sending letters out to everyone it thinks will be affected. It’s therefore important HMRC has your up-to-date address and you can inform them of any recent changes here(Opens new window).

Although your taxpayer status can change depending on your circumstances, individuals will be classed as either resident or non-resident in Scotland for each tax year. There can’t be a situation where someone is treated as a Scottish taxpayer for part of a tax year and a taxpayer in the rest of the UK for the remainder of the year. If in a single year you spend more than six months in Scotland you’ll be Scottish resident and subject to the SRIT for that year and Scottish taxpayers will be identified by the prefix ‘S’ at the start of their tax code.

If the SRIT is set at a level to keep Scottish income tax in line with that paid in the rest of the UK then you won’t see any difference to the tax relief you get if contributing to an individual and/or group personal pension or the income tax you pay if receiving a retirement income.

Where the SRIT changes the burden on Scottish taxpayers then tax relief will continue to be added to your individual and/or group personal pension scheme at the UK basic rate and any difference will be rectified by HMRC via a tax refund or an adjustment to your tax code until 6 April 2018. Thereafter the appropriate rate of tax relief will be applied at source. This delay is to give pension providers time to put the required administrative systems in place.  

Whether you end up paying more or less under the new SRIT it’s important you take the time to understand how these fundamental changes will work and whether or not you’ll be affected.  

If there are any further questions about SRIT, please refer to our FAQ’s.

photo of blog author Elaine Cruickshank

Elaine Cruickshank

Tax and Trusts Manager