Ever since the Scottish public voted to create a new Parliament with tax raising powers back in 1997 there has been the possibility that there would be a divergence of income tax rates between Scotland and the rest of the UK.  However these powers remained unused until the last tax year when there was a slight tweaking of the higher rate threshold.  The current tax year has, however, seen the Scottish Government radically change the income tax bandings in Scotland to an unprecedented 5 bandings, although a lot of people will see very little change in their tax liability as a result.

How, though, do you know if you are affected by these changes?  For the vast majority of individuals it will be clear that they are a Scottish taxpayer as they will live in Scotland – very simple and clear cut.  However, there may be cases that are not so straightforward but essentially an individual will be a Scottish taxpayer if any of the following three tests are satisfied:

·         They are a Scottish Parliamentarian, i.e. MP or MEP for Scottish constituency or an MSP

·         They have a “close connection” to Scotland, e.g. either their only or main residence is in Scotland

·         They have no “close connection” to Scotland (or any other part of the UK) and at least as many days are spent in Scotland as elsewhere in the UK

What is a “close connection”?  In basic terms this is where the main place of residence has been in Scotland for more of the tax year than in any other part of the UK.

So what is “main place of residence”? This is the place the individual can be said to have the greatest degree of connection, for example, their family live there and their children attend school there, they are registered to vote there, the majority of their possessions are there.

What are the tax changes? Importantly, the changes are only to the tax bands and rates of tax.  The personal allowance remains the same as do the underlying tax rules.  The Scottish income tax rates apply to employment, self-employment, pension and rental income, whilst somewhat confusingly the UK rates will continue to apply to interest and dividend income. Employees and pensioners will see changes to their tax codes with these being prefixed with an “S” to signify that they are a Scottish taxpayer.

For the 2018/19 tax year the UK personal allowance of £11,850 will apply, however the Scottish income tax bands will then be as follows:

This is the first year that we have seen such a divergence in the income tax rates between Scotland and the rest of the UK however it would not be surprising if this is only the start. Will we see further removal of Scottish rates from the UK rates?  Will Corporation tax also follow this path in future?  As ever, time will tell.

To discuss the Scottish rate of income tax and how it will affect you, or for any other tax queries – contact Personal Tax Manager, Barry Anderson by calling us on 01383 721421 or email barry.anderson@condie.co.uk