In 2016/2017 for the first time in many years there is a divergence in the income tax rates and thresholds between Scotland and the rest of the UK.
The UK government set the income tax rates for England, Wales and Northern Ireland, but agreed that the Scottish Parliament could set the Scottish rates of income tax (SRIT) independently. The result was that the UK rate of income taxes (20%, 40%, 45%) less 10 pence in the pound, plus Scottish rate of income tax (SRIT) became the Scottish rates of tax. For 2016-17 SRIT was 10%, and as such, Scottish rates remained in alignment with the rest of the United Kingdom.
The Scottish Parliament gained further fiscal freedom for the tax year 2017-18 and used that freedom to set a basic rate threshold that was different to the rest of UK. The Scottish budget set it at £43,430, and HMRC published the P9X with this rate. However, the rate was subsequently amended to £43,000, and once it is ratified by the Scottish Parliament, HMRC will confirm the change to employers and software developers in the usual way.
So, to practicalities. What does it mean for payroll processing? Below are the most common processes that are affected by the different income tax rates, and the impact that the Scottish rates and thresholds will have on them.
Construction Industry Scheme
At present there are two rates of deductions. Which rate to use depends on whether the subcontractor is registered with the scheme or not. For those registered, the deduction is at 20%, with 30% deduction for subcontractors who are not registered.
The Government sees no reason to change the deductions as the correct amount of tax to pay will be identified and accounted for through the regular self-assessment process.
PAYE Settlement Agreements
To identify the tax liability the employer will need to show the different rates of Scottish and the rest of the UK income tax separately.
More information will be issued on GOV.UK
HMRC has confirmed that there will not be a separate category showing on P60s, P45x, FPSs and payslips. This is because all such information will be shown on individual annual tax summaries and in Personal Tax Accounts.
Employers need only operate the tax codes that are issued.
This is less complex as the rate of tax relief given is at the employee’s marginal rate, whether at the Scottish rate of income tax or at the rest of UK rate.
No change, process pay as normal.
For pensions that are operated on the net pay arrangement tax relief should be given at the employee’s marginal rate of tax.
For pensions that receive relief at source it has been agreed that the UK rate will be given up to April 2018, with HMRC making any relevant adjustments through PAYE coding or the self-assessment process.
Until April 2018 no change in processing pay.
Student taxpayer status
Student status is according to the ‘close connection’ test. That most likely means that the rate of income tax applied is dependent on where in the UK the rest of the family reside.
Process pay according to tax code given.
Memorandum of understanding
To implement the Scottish rates and thresholds an agreement was drawn up between the Scottish and UK governments that lays out their respective responsibilities in relation to the implementation and operation of the Scottish income tax efficiently and effectively.
Below is a brief outline of the main points of the memorandum
- HMRC will identify the Scottish taxpayers
- HMRC will maintain accurate records of Scottish taxpayers by updating the identifier as home addresses changed
- Before the start of the first year that SRIT comes into force HMRC will issue tax codes with S prefix
- HMRC will, if appropriate, inform third parties (pension providers and the like) if an individual is a Scottish taxpayer.
- The self-assessment regime to be updated to allow Scottish taxpayers to declare their status as part of their annual return
- HMRC to conduct a risk assessment and analysis to ensure compliance by employees in relation to Scottish taxpayer status, and that employers are operating their PAYE system according to regulation.
The Government has tried to minimise the disruption for employers caused by the processing of the Scottish rates and thresholds. All government fiscal systems have up to now been designed to cater for UK as one entity. It will take some time before all processes have been reviewed and altered to cater for the different rates. It is inevitable that there will be ‘teething problems’. It is to be hoped that they will not be overwhelming and can be resolved in a timely fashion.
Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.