The Scottish Rate of Income Tax (“SRIT”) will commence on 6 April 2016 and applies to individuals who reside in Scotland. The rate of SRIT is due to be announced on 16 December 2015 and will impact on both employers and employees.
At present the rates of income tax that apply in the UK are 20%, 40% and 45%. From 6 April 2016 all these rates are to be reduced by 10% for SRIT taxpayers and instead the SRIT is to be charged. Therefore if the SRIT is introduced at a rate of 12% Scottish taxpayers will pay tax at 22%, 42% and 47%. Alternatively if the rate is announced at 8% Scottish taxpayers will pay tax at 18%, 38% and 43%. Hopefully for the first year it will be introduced at a rate of 10% meaning that the tax does not change and will allow employees and employers to get used to the new systems without causing any under/over payments of income tax.
Who is a Scottish Tax payer?
A Scottish tax payer is an individual who lives in Scotland. It does not matter where they perform the work nor where their employer is based. Therefore a number of employers who are based near to the border could have a proportion of their workforce paying SRIT and a proportion paying UK income tax. A company based in the South of England could find that it has a small number of Scottish tax payers if it has sales representatives living in and covering Scotland. It is important to realise that SRIT can apply to all employers and not just those based in Scotland.
Where an employee moves to/from Scotland part way through a year it is important that they notify Her Majesty's Revenue and Customs (HM Revenue and Customs or HMRC) is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage.... More of their change of address so that the correct tax can be collected through the PAYE system. Similarly where a person has more than one home and one of them is based in Scotland it is important to determine which is the employees main home so that SRIT can be withheld, if appropriate.
The key message is that it is the employee’s responsibility to ensure that HMRC has the correct address. HMRC has recently commenced sending letters to those who is believes will be Scottish tax payers making them aware of SRIT and asking them to notify HMRC is the address held by HMRC is not correct.
What does this mean for an employee?
If they are a Scottish tax payer then the amount of tax withheld from their earnings will include both SRIT and the adjusted UK income tax. It is uncertain if payroll software providers will show SRIT separately on the payslip or just a composite tax withholding – It will probably vary depending on which software your employer uses. As indicated above the rate of SRIT may vary from the standard UK rate of income tax and therefore deductions could be higher or lower than other UK tax payers.
It is the employee’s responsibility to notify HMRC of any change of address. Some employee’s assume that notifying their employer is sufficient but this is not the case and it is important that changes are notified as early as possible so that the correct determination can be made.
What does this mean for employers?
An employer will have to ensure that the payroll software it uses from next April can cope with the calculation and reporting of SRIT. Employee code numbers for Scottish tax payers will have “S” as a prefix so that an employer knows who they should operate SRIT on. If an employee commences work without a form P45 the employer should operate the usual UK income tax rates until HMRC instruct otherwise.
When an employee leaves or at the end of the tax year the employer will have to provide the employee with a form P45 or P60. It will not be necessary to show the SRIT separately on these forms although the code number for a Scottish tax payer should clearly show the “s” prefix. If an employer receives a handwritten form P45 they should carefully review the form to make sure that the prefix is an “S” and not a “5”.
If an employer enters into a PAYE settlement Agreement for 2016/17 onwards and this includes some employees who are Scottish tax payers it will be necessary to calculate SRIT as part of the PSA computations. A PAYE settlement agreement is an arrangement whereby the employer pays the employee’s tax on certain benefits in kind on a grossed up basis. Employers will need to be able to identify the cost of benefits provided to Scottish tax payers – this may require a review of the way in which the employer captures the PSA data. This will have to be effective from April 2016 and not sometime in the middle of 2017 when the employer is calculating the PSA tax.
There is likely to be an impact on pension contributions that are made under the “Relief at Source” rules for Scottish tax payers. However HMRC has allowed pension providers to make claims using the normal UK rates until they can alter their systems to cope with SRIT. However this must be before April 2018.
Key Actions for employees
- If the employee believes that they are a Scottish tax payer they should receive a letter from HMRC confirming this. If a letter has not been received by end of February they should contact HMRC to ensure that they have the correct address on their file.
- Notify HMRC of any change of address as soon as possible, especially if this has occurred in the current tax year as HMRC will have based their information on the data they held as some point in the tax year.
- If the employee has two homes, one of which is based in Scotland and the other in another UK country then they should review which one is their main address. If HMRC usually corresponds to them at the wrong address notify HMRC so that they can correctly determine if they are liable to SRIT
Key Actions for employers
- You may want to make your employees aware of SRIT although I think that HMRC are increasing publicity over the next few months to raise awareness of this. You should however encourage your employees to make sure that HMRC has their correct address.
- Ensure that your payroll software will be able to handle the introduction of SRIT. I would expect most commercial software to deal with this but if you use bespoke in-house payroll software this may need amending.
- It may be worthwhile introducing a system review where you are notified either by HMRC or a new employee that they are liable to SRIT. This could be a simple check of their address on the payroll system to ensure that it is based in Scotland.
- Review data capture procedures where you have Scottish employees who are in receipt of benefits which the company has included within a PAYE settlement Agreement.
If you require any assistance with dealing with SRIT please do not hesitate to contact Paul Spenceley.