How does the Scottish rate of income tax work?

Updated on 27 April 2016

If you are a Scottish taxpayer, you might have to understand the Scottish rate of income tax (SRIT). We explain how it works, how it is collected and how it affects things like gift aid donations and pension contributions.

The SRIT applies from 6 April 2016.

It only affects Scottish taxpayers. It applies to non-savings and non-dividend income only. Scottish taxpayers continue to pay income tax at the same rates that apply in the rest of the UK on their savings and dividend income.

The Scottish Government proposes a single rate for the SRIT in its annual draft budget, published in the autumn. This rate must then be agreed and put into law by the Scottish Parliament

The rate of the SRIT for 2016/17 is 10%.

How does the Scottish rate of income tax work?

From 6 April 2016, the income tax rates payable by Scottish taxpayers on their non-savings and non-dividend income are calculated as follows:

  1. Reduce each of the main UK income tax rates by 10%, leaving
    o basic rate of 10%;
    o higher rate of 30%; and
    o additional rate of 35%.
  2. Add the single SRIT set by the Scottish Parliament (10% for 2016/17) to each of the three rates, creating
    o Scottish basic rate of 20%;
    o Scottish higher rate of 40%; and
    o Scottish additional rate of 45%.

Since the single SRIT set by the Scottish Parliament for 2016/17 is 10%, the income tax rates for Scottish taxpayers are the same as for taxpayers elsewhere in the UK. The way the SRIT works means that the Scottish Parliament sets one rate (the SRIT), and this produces three Scottish main rates of income tax.

If Scottish taxpayers have taxable savings income, such as bank interest, or taxable dividend income, this is subject to the main UK rates of income tax for those types of income.

The SRIT does not affect the tax allowances to which you are entitled, such as the personal allowance; nor does it affect the income tax bands or the thresholds, such as the threshold between the basic rate and higher rate of income tax.

The amount of income tax you pay according to the reduced UK rates (shown at step 1 above) goes to the UK Government; the amount of income tax you pay according to the SRIT goes to the Scottish Government.

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How does the Scottish rate of income tax affect how much tax I pay?

The SRIT took effect on 6 April 2016.

The rate of the SRIT for 2016/17 is 10%.

This means that Scottish taxpayers pay income tax at the following rates on their non-savings and non-dividend income in 2016/17:

  • Scottish basic rate of 20%;
  • Scottish higher rate of 40%; and
  • Scottish additional rate of 45%.

These are the same as the UK rates of income tax. If you are a Scottish taxpayer in 2016/17, you will pay the same amount of income tax overall that you would have paid if you were a taxpayer living in England, Wales or Northern Ireland with the same amount of earned income.

Example

Alastair lives in Dundee. He earns £15,000 in 2016/17. He pays income tax under PAYE and his tax code is S1100L.

Cheryl lives in Newcastle. She also earns £15,000 in 2016/17. She pays income tax under PAYE and her tax code is 1100L.

The income tax payable by each of Alastair and Cheryl is calculated as follows:

Earned income                                   15,000

Deduct: Personal Allowance              11,000

Taxable income                                    4,000

Alastair: Income tax payable at Scottish basic rate of 20%               £800

Cheryl: Income tax payable at UK basic rate of 20%                         £800

HMRC collect £800 income tax through the PAYE system from each of Alastair and Cheryl. For Alastair, they pass £400 to the UK Government and £400 to the Scottish Government. Alastair does not see this split on his P60 or payslip – all he sees is that he has an “s”-code indicating that he is a Scottish taxpayer. HMRC pass all of Cheryl’s income tax to the UK Government.

Note: National Insurance contributions are not affected by the introduction of SRIT.

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What types of income does the Scottish rate of income tax apply to?

The SRIT took effect on 6 April 2016.

The SRIT applies to non-savings and non-dividend income of Scottish taxpayers. So, for example, if you are a Scottish taxpayer, the SRIT affects the amount of income tax you pay on:

  • employment income;
  • profits from self-employment (including from sole trades and partnerships);
  • rental profits;
  • pension income (including the state pension);
  • taxable benefits.

The SRIT does not apply to savings income and dividend income. This means it does not affect the amount of income tax you pay on bank or building society interest or dividends.

Construction industry scheme (CIS)

If you are a subcontractor, the payments you receive under the CIS may be subject to deductions – 20% for registered subcontractors; 30% for subcontractors not registered with the scheme. Whether you are a Scottish taxpayer or not, contractors make deductions at the UK rate – either 20% or 30% as appropriate. If you are a Scottish taxpayer, you are liable to pay income tax at the SRIT on your earned income, and your final tax liability will be calculated through your self assessment tax return.

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How is the Scottish rate of income tax collected?

The SRIT took effect on 6 April 2016.

HMRC are responsible for the collection and administration of all income tax in the UK, including the SRIT.

Scottish taxpayers pay income tax calculated according to the SRIT under the Pay As You Earn (PAYE) system or self assessment.

HMRC notify individuals who appear to be Scottish taxpayers based on the information on their systems. If you receive a notification letter, you should read it carefully and check whether or not you agree with HMRC. If you do not agree, you can appeal.

If you are within PAYE, HMRC issue a tax code to tell your employer or pension payer to deduct the correct amount of income tax. You can tell if you are paying SRIT, as the tax codes for Scottish taxpayers start with the letter “S”, for example, a typical tax code would be S1100L. HMRC may issue you with a PAYE coding notice. You can also see your tax code on your payslip, form P60 or form P45.

There is information on how to check your coding notice in the ‘employed section’ of this website.

If you are not within PAYE and submit a self assessment tax return, you must check the appropriate box on the return to indicate that you are a Scottish taxpayer.

You are not able to see the split between income tax paid according to UK rates and income tax paid according to SRIT on your payslip, form P60 or form P45. However, your annual tax summary (if you receive one) produced by HMRC shows the split.

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How does the Scottish rate of income tax affect my gift aid donations?

The SRIT took effect on 6 April 2016.

If you are a Scottish taxpayer, any donations you make under gift aid continue to benefit from tax relief.

Gift aid for charities applies at the UK basic rate (currently 20%), regardless of whether or not the donor is a Scottish taxpayer.

If you pay income tax at the higher or additional rate, you can claim back from HMRC the difference between the Scottish higher or additional rate you paid and the Scottish basic rate.

If you normally complete a self assessment tax return, tell HMRC about your gifts to charity – and claim any tax relief – by completing the appropriate section on your tax return.

If you do not complete a tax return, you may have to claim a refund directly from HMRC.

If you make a donation to charity under the payroll giving scheme, you should receive the correct tax relief automatically.

It is important to keep records of all your donations made under gift aid.

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How does the Scottish rate of income tax affect my pension contributions?

The SRIT took effect on 6 April 2016.

If you are a Scottish taxpayer, you receive tax relief on your pension contributions at the Scottish rates, as determined according to the SRIT.

If you pay contributions to your employer’s pension scheme under net pay arrangements, you automatically receive tax relief at the Scottish rates, if appropriate.

If you pay contributions and receive tax relief at source, you do not automatically receive tax relief at the Scottish rates at present. There is a transitional period from April 2016 to April 2018 during which your pension provider is continuing to claim tax relief at the UK basic rate of income tax, even if you are a Scottish taxpayer. During the transition, HMRC are making any adjustments to tax relief through self assessment or PAYE coding. After the transition, pension providers should automatically claim tax relief at the Scottish rates where appropriate.

If you pay tax at the higher or additional rates of income tax, you can claim any further tax relief from HMRC through self assessment, by completing a tax return.

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How does the Scottish rate of income tax affect income from trusts and deceased estates?

The SRIT took effect on 6 April 2016.

Trusts, bodies of trustees, personal representatives and deceased estates cannot be Scottish taxpayers. This means that any income they receive is chargeable at the appropriate UK rates.
If you are a Scottish taxpayer and you receive income or are entitled to income from a trust or deceased estate, you may be chargeable to income tax at the Scottish rates calculated according to the SRIT on this income.

We only consider UK-resident trusts below, not those resident overseas.

Bare trusts

Beneficiaries of bare trusts must include income of the trust as part of their total income. If you are a Scottish taxpayer, and you are the beneficiary of a bare trust arrangement, you are liable to the SRIT on non-savings income of the bare trust.

Discretionary and accumulation trusts

Income payments from discretionary trusts are always treated as non-savings income. If you are a Scottish taxpayer and you receive income payments from a discretionary trust, you are liable to the SRIT on this income. The income is treated as being received net of tax at the trust rate – so there is a tax credit of 45%.

Deceased estates and interest in possession trusts

You can receive either savings or non-savings income from a deceased estate or an interest in possession trust. In both cases, you receive the income net of UK basic rate income tax (20%).

If you are a Scottish taxpayer and you receive savings income from a deceased estate or interest in possession trust, you are liable to UK main rates of income tax on this income.

If you are a Scottish taxpayer and you receive non-savings income from a deceased estate or interest in possession trust, you are liable to pay tax at the Scottish rates calculated according to the SRIT on this income.

Settlor interested trusts
These are trusts where the settlor or certain family members can benefit from the trust. The trustees must pay tax on income of the trust at the appropriate rate.

The settlor is liable to income tax on the income and receives a tax credit for the tax paid by the trustees. If the settlor is a Scottish taxpayer, they will be liable to pay tax at the Scottish main rates calculated according to the SRIT.

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