How does Scottish income tax work?

Updated on 10 April 2018

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

Scottish income tax has applied since 6 April 2017.

Scottish income tax 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 its rates and bands for Scottish income tax in its annual draft budget, published in the autumn. These rates and bands must then be agreed and put into law by the Scottish Parliament.

The rates and bands are on our page ‘what is Scottish income tax?'

How does Scottish income tax work for 2017/18 onwards?

From 6 April 2017, the Scottish Parliament sets the income tax rates and bands that apply to the non-savings and non-dividend income of Scottish taxpayers.

This means that Scottish taxpayers do not pay income tax according to the UK rates and bands on their non-savings and non-dividend income.

The Scottish Parliament has the power to set as many rates and bands as it would like. For 2018/19, it has chosen to have five income tax rates and bands, with a starter rate (19%), basic rate (20%), intermediate rate (21%), higher rate (41%) and top rate (46%). The higher rate threshold is £43,430, compared to £46,350 in the rest of the UK, meaning that when taken together, the starter, basic and intermediate bands of Scottish income tax in 2018/19 equal £31,580 (43,430 – 11,850 personal allowance).

For 2017/18, the Scottish Parliament kept the same three rates and bands structure as the rest of the UK, and merely set one different threshold. The threshold between the basic rate band and the higher rate band was set at £43,000 for those entitled to the UK personal allowance, compared to £45,000 in the rest of the UK. The basic rate band for Scottish income tax in 2017/18 was therefore £31,500 (43,000 – 11,500 personal allowance).

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.

Scottish income tax does not affect the tax allowances to which you are entitled, such as the personal allowance.

From 2017/18 onwards the amount of income tax you pay on non-savings and non-dividend income according to the Scottish income tax rates and bands goes to the Scottish Government; any income tax you pay on savings or dividend income according to the UK rates and bands goes to the UK Government.

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How does Scottish income tax affect how much tax I pay?

Scottish income tax took effect on 6 April 2017.

The rates and bands of Scottish income tax are on our page ‘what is Scottish income tax?

This means that Scottish taxpayers pay income tax at the following rates on their non-savings and non-dividend income in 2018/19:

  • Scottish starter rate of 19%;
  • Scottish basic rate of 20%;
  • Scottish intermediate rate of 21%;
  • Scottish higher rate of 41%; and
  • Scottish top rate of 46%.

If you are a Scottish taxpayer in 2018/19, you may pay a different amount of income tax overall than you would pay if you were a taxpayer living in England, Wales or Northern Ireland with the same amount of earned income. If you have earned income of less than £26,000, you will probably pay less income tax than you would if you lived in England, Wales or Northern Ireland. If you have earned income of more than £26,000, you will probably pay more income tax than you would if you lived in England, Wales or Northern Ireland.

Example – lower income taxpayer

Gordon lives in Stirling. He earns £15,000 in 2018/19. He pays income tax under PAYE and his tax code is S1185L.

Toby lives in Leeds. He also earns £15,000 in 2018/19. He pays income tax under PAYE and his tax code is 1185L.

The income tax payable by each of Gordon and Toby is calculated as follows:

Earned income                                   £15,000

Deduct: Personal Allowance              £11,850

Taxable income                                    £3,150

Gordon: Income tax payable at Scottish starter rate of 19% (2,000)      £380

Scottish basic rate of 20% (1,150)      £230

Total Scottish income tax      £610

Toby: Income tax payable at UK basic rate of 20%      £630

HMRC collect £610 income tax through the PAYE system from Gordon and £630 income tax through the PAYE system from Toby. They pass all of Gordon’s income tax to the Scottish Government. Gordon sees that he has an “S”-code indicating that he is a Scottish taxpayer. HMRC pass all of Toby’s income tax to the UK Government.

Example – higher income taxpayer

Alejandra lives in Stirling. She earns £45,000 in 2018/19. She pays income tax under PAYE and her tax code is S1185L.

Priti lives in Leeds. She also earns £45,000 in 2018/19. She pays income tax under PAYE and her tax code is 1185L.

The income tax payable by Alejandra is calculated as follows:

Earned income                                   £45,000

Deduct: Personal Allowance              £11,850

Taxable income                                  £33,150

Alejandra: Income tax payable at Scottish starter rate of 19% (2,000)    £380

      Scottish basic rate of 20% (10,150)   £2,030

    Scottish intermediate rate of 21% (19,430)   £4,080

                Scottish higher rate of 41% (1,570)   £644

                  Total Scottish income tax payable   £7,134

The income tax payable by Priti is calculated as follows:

Earned income                                  £45,000

Deduct: Personal Allowance             £11,850

Taxable income                                 £33,150

Priti: Income tax payable at UK basic rate of 20% (33,150)  £6,630

Alejandra is a Scottish taxpayer and her non-savings and non-dividend income exceeds the Scottish income tax higher rate threshold of £43,430, so she has to pay some income tax at the higher rate of 41%. Moreover, due to the new 5-band structure of Scottish income tax, she has to consider four rates and bands of tax. In contrast, Priti is a UK taxpayer, and her earned income falls entirely within the UK income tax higher rate threshold of £46,350, so she only has to pay income tax at the basic rate of 20%.

HMRC collect income tax through the PAYE system from each of Alejandra and Priti. They pass all of Alejandra’s income tax to the Scottish Government. Alejandra sees that she has an “S”-code indicating that she is a Scottish taxpayer. HMRC pass all of Priti’s income tax to the UK Government.

Note: National Insurance contributions are not affected by the Scottish income tax.

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How does Scottish income tax interact with UK income tax?

Scottish income tax took effect on 6 April 2017.

The rates and bands of Scottish income tax are on our page ‘what is Scottish income tax?

The rates and bands of UK income tax are on our ‘tax and NIC rates’ page.

If you are a Scottish taxpayer, you may have to pay income tax according to both the Scottish rates and bands and the UK rates and bands. This may happen if you have earned income (Scottish income tax) and savings and / or dividend income (UK income tax).

In 2017/18, the only difference between the UK and Scottish rates and bands related to the higher rate threshold. This, together with reliefs such as the personal savings allowance and dividend allowance, meant that this was unlikely to affect you.

In 2018/19, due to the new 5-band structure of Scottish income tax, this is far more likely to affect you.

Example

Stephanie is a Scottish taxpayer in 2018/19. She has earned income of £18,500 and savings income of £2,000.

She has to pay income tax as follows:

Total income (18,500 + 2,000)                        £20,500

Personal allowance                                       £11,5850

Taxable income                                                 £8,650

On her earned income, she has to apply Scottish income tax rates and bands:

Taxable earned income (18,500-11,850)          £6,650

2,000 at Scottish starter rate of 19%                   £380

4,650 at Scottish basic rate of 20%                     £930

Total at Scottish income tax rates                     £1,310

On her savings income, she has to apply UK income tax rates and bands:

Taxable savings income                                   £2,000

Personal savings allowance (1,000) at 0%               0

1,000 at UK basic rate of 20%                            £200

Total at UK income tax rates                               £200

Total income tax payable                                  £1,510

Her personal savings allowance is £1,000, because her total taxable income falls entirely within the UK basic rate band (20,500 is less than 46,350). To work out her remaining basic rate band for the UK income tax calculation, we need to take the higher rate threshold of £46,350 and deduct Stephanie’s earned income and her personal savings allowance (46,350-18,500-1,000 = £26,850).

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

Scottish income tax took effect on 6 April 2017.

Scottish income tax applies to non-savings and non-dividend income of Scottish taxpayers. So, for example, if you are a Scottish taxpayer, Scottish income tax 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.

Scottish income tax 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 Scottish income tax rates on your earned income, including these CIS payments, and your final tax liability will be calculated through your self assessment tax return.

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How is the Scottish income tax collected?

Scottish income tax took effect on 6 April 2017.

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

Scottish taxpayers pay income tax calculated according to Scottish income tax rates and bands 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 Scottish income tax, as the tax codes for Scottish taxpayers start with the letter “S”, for example, a typical tax code would be S1185L. HMRC may issue you with a PAYE coding notice, or you can check it on your personal tax account. 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 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 Scottish income tax rates on your payslip, form P60 or form P45. However, your annual tax summary (if you receive one) produced by HMRC shows the split. From 6 April 2017, if you do not have any savings or dividend income, you may not pay any income tax according to the UK rates and bands.

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

Scottish income tax took effect on 6 April 2017.

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. This means that the charity claims tax relief at 20% from HMRC on any donations you make under gift aid, even if you only pay tax at the Scottish starter rate of 19%. As with any gift aid donation, if you do not actually pay enough tax to cover the tax relief that the charity claims, HMRC may ask you to pay the difference. There is more information in our section on giving to charity.

If you pay income tax at a rate higher than the basic rate, you can claim back from HMRC the difference between the 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 income tax affect my pension contributions?

Scottish income tax took effect on 6 April 2017.

If you are a Scottish taxpayer, you receive tax relief on your pension contributions according to the Scottish rates and bands.

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.

For 2018/19 pension providers who operate relief at source arrangements will give tax relief at the rate of 20% on pension contributions made by Scottish taxpayers.

If you pay tax at a rate higher than the Scottish basic rate of income tax, you can claim any further tax relief from HMRC through self assessment by completing a tax return or by contacting HMRC to make an adjustment to your PAYE code.

If you are a non-taxpayer, or only pay income tax at the Scottish starter rate of 19%, you will also get relief at source of 20%. HMRC will not seek to recover the extra tax relief that you have received, so you do not need to contact HMRC about this.

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

Scottish income tax took effect on 6 April 2017.

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 according to the Scottish rates and bands 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 Scottish income tax 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 Scottish income tax on this income. The income is treated as being received net of tax at the UK 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 according to the Scottish rates  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 according to the Scottish rates and bands.

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