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Scottish Budget

Confirms the Scottish Rate of Income Tax and announces changes to the Land and Buildings Transaction Tax

The Scottish Government set out tax and financial plans for the future in their draft Budget on 16 December 2015. The Deputy First Minister and Cabinet Secretary for Finance, Constitution and Economy, John Swinney, announced that the Scottish Rate of Income Tax (SRIT) would be set at 10p in the pound for 2016/17.

The Scotland Act 2012 granted the Scottish Parliament landmark new powers to set a separate annual rate of income tax for Scottish taxpayers. The Scottish rate of income tax (SRIT) comes into effect in April 2016 and represents a fundamental change to the UK tax system.

Two types of income tax

Under the new regime, with effect from 6 April 2016 taxpayers who are deemed to be resident in Scotland will pay two types of income tax. The UK rates of income tax will be reduced by 10p for Scottish taxpayers, and the Scottish Parliament will levy the SRIT in its place. It has now been confirmed that the Scottish Rate of Income Tax (SRIT) will be 10 pence in the pound ensuring that overall tax rates will remain the same as in the rest of the UK.

The Scottish Parliament has the choice of whether to reduce or increase the SRIT beyond 10p, and there are no lower or upper limits. However, on this occasion the income tax rate has been frozen at 10p in the pound. Commenting on the decision, Mr Swinney remarked: 'The simple fact is this tax power does not enable me to target help to those on the lowest incomes'.

What does SRIT apply to?

The SRIT will apply to most mainstream sources of income such as PAYE income, pensions, rental profit and profits from self-employment.

The SRIT does not apply to income from savings such as building society interest or dividends. These rates will stay the same for all taxpayers across the UK.

Who does the SRIT apply to?

Broadly, a Scottish taxpayer is someone who is UK resident for tax purposes and has one place of residence which is in Scotland.

Individuals who have more than one place of residence in the UK need to determine which of these has been their main place of residence for the longest period in a tax year. Individuals who cannot identify a main place of residence will need to count the days they spend in Scotland and elsewhere in the UK. If they spend more days in Scotland, they will be a Scottish taxpayer.     

It is intended that HMRC will contact potential Scottish taxpayers before April 2016. If the address which HMRC holds is in Scotland then the individual will be classed as a Scottish taxpayer.

Employers

Any employer in the UK will see a change to PAYE procedures if an employee is classed as a Scottish taxpayer. A special PAYE code, prefix S, will apply to Scottish taxpayers and will be notified to employers and pension providers by HMRC where appropriate.

However, there will be no substantive changes for employers as a result of SRIT. An employer will not have to make any assessments on taxpayer status. Employers should not change a tax code unless advised to do so by HMRC. PAYE software will need to be updated to cope with the new 'S' codes.

HMRC has recently advised that there is no requirement for employers to include the Scottish rate separately on the P60 (end of year certificate). However, the P60 should show a Scottish tax code where appropriate.

Land and Buildings Transaction Tax

As well as paving the way for the changes to income tax outlined above, the Scotland Act 2012 also resulted in the introduction of Land and Buildings Transaction Tax (LBTT) in Scotland, replacing the Stamp Duty Land Tax applying in the rest of the UK, as well as changes to the landfill tax regime in Scotland.

The draft Budget also introduces a LBTT supplement on purchases of additional residential properties, such as buy-to-let properties and second homes. This supplement will be 3 percentage points of the total price of the property for all relevant transactions above £40,000 and will be levied in addition to the current LBTT rates.

The Scotland Bill 2015 proposes the further devolution of additional tax and spending powers to the Scottish Parliament. The Scotland Bill 2015 is still subject to consideration and amendment by the UK Parliament.

Please contact us if you would like help with SRIT, including determining whether or not you are a Scottish taxpayer.

Internet links: Gov.UK SRIT Scotland.gov.uk/News