Upcoming changes to Scottish tax

Hi all, our latest featured blog post is an update from Magda (our tax expert pal at PwC) about some important upcoming changes to the Scottish tax system. Nothing is certain in life except death and changes in tax laws, so make sure you protect yourself and your business by getting ahead of the curve. Magda is in CodeBase on Thursdays, so if you have any pressing questions about the changes get in touch and she'll be happy to help! 

 
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Following the 2017/18 budget speech, we would like to bring to you attention the changes to the Scottish Rate of Income Tax (SRIT). As an employer you are required to keep tracking the changes affecting payroll in order for your employees to have the right amount of tax deducted under Pay As You Earn (PAYE) system. Failing to do so could result in deducting the incorrect amount of tax which in result could lead to the underpayment of tax and therefore penalties.

From 6 April 2018 new rates of tax will apply to Scottish taxpayers which are listed below. You should check with you payroll provider whether they are aware of this and if the necessary updates to their system have been made.

Scottish income tax is only payable by Scottish taxpayers. HMRC will determine whether or not the individual is a Scottish taxpayer based on where the main place of residence is, so if an employee has a Scottish address then this is straightforward and the employer should apply the tax code received from HMRC.

HMRC need to know if you/your employees have changed address. It is always the responsibility of the employee to update HMRC of any changes of address. 

Scottish Rate of Tax

 
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An employee identified as a Scottish taxpayer will have an S at the start of their code. Noted below are the Scottish codes:

 
  • Basic rate 20% - code SBR
  • Intermediate rate 21% - code SD0
  • High rate 41% - SD1
  • Top rate 46% - SD2

The key areas affected by the changes are listed below together with information on what you should do now:

 
 
  • Payroll - in our experience there were not significant problems with payroll providers or payroll software not being able to cope with the divergence of the rates and bands for 2017-18. However, the changes are complex for 2018-19 so we would recommend that you check if your payroll or software provider to see if they are able to facilitate these changes;
  • Marriage Allowance -  there still needs to be a decision to which level Marriage Allowance should be available and once this has been confirmed legislative amendments are required such that the UK legislation refers to the appropriate rates/bands, such as Scottish Starter, Basic and Intermediate rate bands. The assumption at the moment if that those three bands will still be entitled to the marriage allowance but confirmation is needed of the rate at which this will be allowed i.e. all bands might be calculated at 20% for simplicity.
  • Tax Free Childcare - currently the annual basic earnings assessment must compare anticipated annual earnings against UK bands to identify the maximum values of tax-free childcare support available (even for Scottish taxpayers). There is a communication issue for employers / payroll operators and employees to understand this. We are waiting for confirmation to see if this that this will continue to be based on UK, which is the likely to be the case;
  • PAYE Settlement Agreement (PSA) - if you enter into a PSA for 2017/18 onwards and the costs included in it relate to Scottish taxpayers, it will be necessary to calculate SIT as part of the PSA calculations. You will need to be able to identify the cost of benefits provided to Scottish taxpayers as a share of the tax paid under a PSA will be paid to the Scottish Government so this may require a review of the way in which you, as an employer capture the PSA data. If you have multi sites that you need to collate this information and you need assistance with this PwC has a tool call "PSA+" that can process large amounts of data and identify Scottish liabilities by filtering details by tax codes. It then produces a computation with the breakdown in rates for both the rest of the UK versus the Scottish liabilities: and
  • International assignees - consider the impact for tax equalised individuals on assignment to the UK who are considered a Scottish taxpayer as there will be an impact on them for both the higher and top rate. You may also wish to revisit your existing policies for their mobile population, particularly where these policies state that the individual should be equalised to the UK and consider different approaches for managing cross-border tax employment tax issues and the effect that the Scottish changes may have on talent management.
  • Tax Relief on Gift Aid - It is expected that (as currently) charities will continue to claim relief at 20%. If a taxpayer only pays tax at 19%, there will be a loss to the Exchequer and hence Ministerial agreement is needed on this point. There is a need to ensure the legislation provides for relief to be applied at all appropriate rates by extension of all appropriate bands. If this is the case it is likely that more Scottish taxpayers will have to complete tax returns in order to obtain correct tax relief, which is probably something that they don't do at the moment.
  • Tax Relief on Pension Contributions - communications to employees as there will be more of an incentive to save for retirement for those earning over £24,000 and those earning between £11,850 and £13,850 if basic rate tax relief continues to be claimed automatically by pension providers. It has been confirmed by HMRC that for the tax year 2018-19 the 20% reclaim will remain in place but will be discussed further for future years. This means that Scottish taxpayers on 21%, 41% and 46% will have to complete tax returns in order to obtain correct tax relief (unless there is a salary sacrifice arrangement in place), which in particular for employees on 21%, is probably something that they don't do at the moment. There is also the consideration of the 19% employees getting additional relief and who will cover these additional costs.
 

I will be in CodeBase at the PwC space most of Thursdays for couple of hours if you have any questions in regard to the above or any other tax questions. If I'm not available then you can send me an email: magdalena.zawisla@pwc.com

Thank you and kind regards ,

Magda