What's SRIT all about?

These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.

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The Scottish rate of income tax (SRIT) was included as part of the Scotland Act 2012 and will start to take effect from 6 April 2016.

It will give the the Scottish Parliament power to set the amount of income tax that Scottish taxpayers will pay and, as a result, will influence the amount that the Scottish Government has to spend in Scotland. In effect, the intention is that tax collected under the Scottish rate will go to the Scottish Government with a corresponding change in the funding currently received from the UK Government. 

The SRIT will apply to employment, pensions and rental income. It will not apply to savings or dividend income so UK rates will continue to apply to income from these sources. 

From 6 April 2016, the UK income tax rates will not apply in full to Scottish taxpayers. Instead, they will be subject to UK tax at ten percentage points lower than the full UK rates. The Scottish Government can then set its own tax rate in addition, which will be known as the Scottish rate.

The first SRIT figure was announced in the Scottish Budget on 16 December 2015 at 10%, meaning that Scottish rates for employment, pensions and rental income in the 2016/17 tax year will be the same as UK rates.

In practice, the SRIT will be collected by HM Revenue & Customs (HMRC). 

The current UK income tax rates are:

Basic rate = 20%; higher rate = 40%; additional rate = 45%.

For a Scottish taxpayer, these UK rates will be reduced to 10%, 30% and 35% in the 2016/17 tax year. The SRIT amount of 10% will then be added back on to produce the following results for the 2016/17 tax year: 

  Scottish basic rate Scottish higher rate Scottish additional rate
Scottish rate 10% UK 10% + 10% = 20%  UK 30% + 10% = 40%  UK 35% + 10% = 45% 

The Scottish Government can only set one rate to apply to the basic, higher and additional rate tax bands. It cannot set one rate to apply for basic rate tax and another for higher rate tax or additional rate tax. The personal allowance levels and tax bands will continue be the same for all taxpayers in the UK when the SRIT is introduced in 2016/17. There is a Scottish rate of income tax calculator available on the Scottish Parliament website.

Firstly, a person must be UK resident for tax purposes in order to be a Scottish taxpayer. In other words, if someone is not UK tax resident then they cannot be a Scottish taxpayer.

A person will be classed as a Scottish taxpayer by their residency status rather than their nationality or where they work. Essentially, someone will be a Scottish taxpayer if their sole or main residence is in Scotland. An individual will either be resident or non-resident in Scotland for a tax year. So, a UK resident will either be classed as a Scottish taxpayer or a UK taxpayer for a tax year – there cannot be a situation where someone is treated as a Scottish taxpayer for part of a year.

Every MSP (member of the Scottish Parliament) will be classed as a Scottish taxpayer. In addition, every MP (member of the UK Parliament) and MEP (member of the European Parliament) who represents a Scottish constituency will be classed as a Scottish taxpayer, irrespective of where they live. 

There will be situations where determining residency status may not be straightforward. HMRC’s technical guidance on Scottish taxpayer status includes a number of examples of this. Here’s a selection to highlight the type of examples covered:

  1. A person could live in Scotland but commute daily to work in England. HMRC say that this person is a Scottish resident as their place of residence is in Scotland.
  2. A person lives in England but is receiving pension income from a pension provider in Scotland. HMRC say that this person is not a Scottish taxpayer as their residence is in England. The location of the pension provider is irrelevant.
  3. A person lives in England but works as a long distance lorry driver across the whole of the UK. HMRC say the person’s only residence is in England so they are not a Scottish taxpayer.
  4. A person lives in England during the week but stays in a holiday home in Scotland each weekend. Their doctor is in England, their English address is used on the electoral register and their car is registered to their English address. HMRC say that this person has two places of residence but their main place of residence is in England so they are not a Scottish taxpayer.
  5. A person lives in England but moves to Scotland in July to live and work. HMRC say that this person has two main places of residence in the tax year but their main place of residence is in Scotland as this is where they will spend the most time in the tax year.  They will therefore be a Scottish taxpayer for that tax year.
  6. A person lives in England but works offshore in Scottish waters on a four weeks on/four weeks off basis. Their possessions are at their home in England, their car is registered to that address and they are also registered to vote there. HMRC say the person’s main place of residence is in England so they are not a Scottish taxpayer.
  7. A person has lived and worked in England for a number of years. They start a one year secondment in April in Scotland so rent out their home in England. They move into accommodation provided by their employer and change their home address for bank accounts and energy suppliers to their new temporary address. They also change their voting address and doctor’s surgery. Despite still owning a home in England and intending to return there after the secondment ends, their main place of residence for the tax year is in Scotland. They are deemed to have a close connection with the country and are therefore treated as a Scottish taxpayer.
  8. A person has a family home in Scotland but works in Wales during the week. They stay in a rented flat whilst in Wales and return home to Scotland each weekend.  Their Scottish address is where they are registered to vote and is used for all correspondence matters. Their doctor’s surgery is also in Scotland. The person’s main place of residence is in Scotland so they have a close connection with the country and are therefore deemed to be a Scottish taxpayer.
  9. A person is a US citizen and employed by a US company. They accept a two year secondment to the UK where they will be based in Scotland. They will be treated as a UK resident from the date they arrive in the UK. They rent a house in Scotland for the two years only returning to the US to visit family during holidays. The person is UK resident for tax purposes whilst they are in the UK and their place of residence is in Scotland. They have a close connection with Scotland and are therefore treated as a Scottish taxpayer.

In practice, HMRC will determine a taxpayer’s status. Where someone has moved between Scotland and the rest of the UK during a tax year, taxpayer status will be based on the longest number of days spent in Scotland or the rest of the UK.

It is not just Scottish businesses that will need to adjust their payroll systems to accommodate Scottish taxpayers. Any business that has employees who are Scottish residents will need to be able to operate the Scottish rate of income tax. 

HMRC have been working on methods to identify Scottish residents using information available to them. In December 2015, they used this information to write to people who they believe to be Scottish taxpayers to inform them that the SRIT is being introduced from 6 April 2016. HMRC are also carrying out a publicity campaign throughout the UK to raise awareness of the SRIT and to urge people whose main residence is in Scotland to contact them if they have not already received a letter from HMRC.

Prior to the start of the 2016/17 tax year, HMRC will issue PAYE tax codes to employers and pension providers as normal. However, codes for Scottish taxpayers will indicate that the Scottish rates should be used for these customers and employees. This will be done by inserting the prefix ‘S’ at the start of the tax code.

Pensions providers will need to take account of Scottish taxpayers in the following circumstances:

1) For Scottish resident employees – to identify these employees as Scottish taxpayers on payroll systems from 6 April 2016.

2) For Scottish resident customers:

a) So that Scottish taxpayers who receive taxable annuity payments, income payments or lump sums from 6 April 2016 are identified on PAYE systems.

b) So that Scottish taxpayers paying pension contributions receive tax relief at the Scottish basic rate on their own personal contributions or on any third-party contributions paid on their behalf. This will work in different ways depending on the type of pension arrangement that contributions are being made to. Further details are given in the section titled ‘More on pension contributions’ below. 

In essence, as the SRIT amount for the 2016/17 tax year means that Scottish taxpayers will pay tax and receive tax relief at the same rates as those in the rest of the UK, there will be no material difference for Scottish taxpayers in 2016/17.  

 

From 6 April 2016, pension providers will need to be able to tax annuity payments and drawdown income payments subject to PAYE tax using the Scottish rates for Scottish taxpayers. They will need to do this using ‘S’ tax code identifiers which will be obtained from information provided by HMRC.

The tax deducted will then need to be reported to HMRC using PAYE real-time information (RTI) submissions.  Annual P60 statements issued to customers will need to show the ‘S’ prefix tax code along with the total tax deducted. There is no need to split the total tax deducted between the SRIT amount and the ‘rest of the UK’ amount.

The calculation method for any taxable payments made using an emergency tax code (such as Uncrystallised Funds Pension Lump Sums) will not change from 6 April 2016. In other words, there will be no specific Scottish emergency tax code. Similarly, small pot payments will still be made using the UK basic rate of income tax for Scottish taxpayers with any under or overpayment being dealt with between the recipient and HMRC. 

There are different ways of giving tax relief on personal and third party pension contributions and this will therefore affect how tax relief can be obtained when the SRIT is introduced.

Net pay - for occupational pension schemes, tax relief on personal contributions is given using the ‘net pay’ method. Gross contributions are deducted from gross pay meaning that employees pay the correct amount of income tax through their payslip. When Scottish taxpayers are identified through their PAYE tax code from 6 April 2016, they will receive the correct amount of tax relief on any personal contributions they make through their pay to an occupational pension scheme. For any personal contributions not made through an employee’s payslip (eg, for large single contributions paid gross near the end of a tax year), there will need to be a claim made to HMRC for the tax relief due.

Relief by claim - contributions to retirement annuity contracts are generally paid gross using the ‘relief by claim’ method. An individual then needs to claim any tax relief due through their self-assessment tax return. This process will continue to apply from 6 April 2016 with any Scottish taxpayers getting tax relief based on the SRIT.

Relief at source - for personal pensions, personal and third party contributions are paid using the ‘relief at source’ method. Contributions are paid net of basic rate tax relief with a sum representing the tax relief being claimed from HMRC to add into the pension arrangement. Higher and additional rate taxpayers can claim higher or additional rate tax relief separately through their self-assessment tax return. If contributions are being paid through a payslip, these are deducted net of basic rate tax relief from net pay.

Collecting pension contributions using the SRIT for the ‘relief at source’ method will not affect pension providers until 6 April 2018. This is to allow time for systems and processes to be put in place to allow providers to collect basic rate tax relief at either the UK rate or at the SRIT depending on whether a particular customer is a Scottish taxpayer or a UK taxpayer.

In the run-up to 6 April 2018, HMRC will operate a two year transitional period starting from 6 April 2016. During that time, pension providers will continue to claim tax relief at the UK basic rate for all personal and third party contributions that are eligible for basic rate tax relief. HMRC will then use their records to identify Scottish taxpayers and make any necessary adjustment direct with scheme members if the Scottish rate is different to the UK rate. Any adjustments made by HMRC will be done either through self-assessment or PAYE coding.

In time for 6 April 2018, pension providers will need to have systems in place to be able to identify Scottish taxpayers based on information provided by HMRC. Providers will then need to use this identifier to collect the correct amount of basic rate tax relief from HMRC for any personal or third-party contributions paid from 6 April 2018. In effect, providers will need to be able to make relief at source (RAS) claims at both the Scottish basic rate and the UK basic rate. 

Even though there will be scope from 6 April 2016 for the Scottish tax rates to be different to UK rates, the operation of the existing double taxation treaties that the UK has with many other countries will continue unaffected. 

In the wake of the Scottish independence referendum vote last year, an agreement was made to enhance the powers that are devolved to the Scottish Parliament. Lord Smith of Kelvin was appointed to oversee this process and the ‘Smith Commission’ report was issued on 27 November 2014. This was followed by the publication of a Government report in January 2015 titled ‘Scotland in the United Kingdom: an enduring settlement.’ On the subject of income tax, the report proposes to give the Scottish Parliament power to set the rates of income tax and the thresholds at which these are paid for the non-savings and non-dividend income of Scottish taxpayers. So, more power will be devolved to the Scottish Parliament with the option for them to introduce new rates and bands of income tax to apply above the UK personal allowance. The report from January 2015 contained draft legislative clauses that have since been included in the Scotland Bill 2015-16, which is currently winding its way through the House of Commons and the House of Lords.

Even with the planned introduction of these new powers, income tax will still remain a shared tax in the UK with MP’s across the UK continuing to decide the UK’s budget. HMRC will continue to collect and administer income tax in the UK with the Scottish Government receiving all income tax paid by Scottish taxpayers on their non-savings and non-dividend income. There will then be an adjustment made to the ‘block grant’ paid to the Scottish Government by the UK Government to reflect the income tax attributed to Scottish taxpayers.

Summary

We now know that the rates for Scottish taxpayers will be the same as those applying to individuals in the rest of the UK for the 2016/17 tax year. However, the SRIT will cause additional work for employers and pension providers, amongst others, in preparation for its introduction. There is also the continuing spectre of the proposals originally contained in the Smith Commission report, which may end up changing the provisions put in place for the SRIT. Separate to that, we may also see changes to the current tax rules for pensions through the Government consultation titled ‘Strengthening the incentive to save: a consultation on pensions tax relief’. Possible outcomes range from radical reforms, such as bringing pensions taxation into line with ISA taxation (the ‘taxed, exempt, exempt’ structure) to keeping the status quo or something else in between.

So, this article is based on what’s currently known even though it may not be the final SRITten word on the subject! 

Finally, if you are looking for more information on the SRIT, you can check out the FAQs on the Aegon website that are aimed at advisers, customers and employers. 

Pensions Technical Services