Introduction

Under devolved powers in the Scotland Act 2012 the Scottish Parliament can set its own income tax rates and thresholds for Scottish taxpayers independently of UK rates (the Scottish rate of Income Tax, or ‘SRIT’). These rates only apply to certain types of income. Income tax allowances and reliefs continue to be set by the Westminster Government, as do other personal taxes including capital gains tax. 

Rates and bands used to date

SRIT first came into effect on 6 April 2016. The Scottish Parliament chose to keep rates and bands aligned with the rest of the UK in 2016/17. In 2017/18, the same rates were retained but the higher rate threshold was set at £43,000, compared to £45,000 in the rest of the UK.

Following the widening of the powers available to the Scottish Parliament, five rate bands were introduced with effect from 6 April 2018. The rates have remained the same up to and including 2022/23. The higher rate and top rate were increased by 1% as of 6 April 2023 while the top rate threshold was reduced to £125,140 from £150,000. The rates and thresholds applicable to relevant taxable income in 2023/24 are as follows:

Income subject to the SRIT 

The SRIT only applies to non-savings and non-dividend income, which includes pensions, rental, employment and self-employment income. It does not apply to interest or dividend income, except where these are taxed on the remittance basis, which applies to certain non-UK domiciled individuals. The rates and bands, with the exception of the starter rate, also apply to pensions annual allowance charges, i.e. where an individual has contributed imore than their annual allowance in a particular tax year.

The Scottish Parliament must apply the same rate to the different types of income within the scope of the SRIT. For example, this means that employment and rental income must be taxed at the same rate. 

Definition of a Scottish taxpayer 

A Scottish taxpayer is defined as an individual who is UK tax resident in a given tax year and: 

• Has their only home in Scotland; 
• Where an individual has more than one home in the UK, including in Scotland, they will need to consider which home has been their main residence for the longest period in a tax year. If this is Scotland, then they will be a Scottish taxpayer; 
• Where an individual cannot identify a home in one country within the UK, they will be a Scottish taxpayer if they spend more days in Scotland in that tax year than any other part of the UK; or 
• Is a Member of Parliament for a constituency in Scotland, or a Member of the Scottish Parliament. 

A home for these purposes is defined in a similar way to the definition that applies when considering whether an individual has a home or only home in the UK for the purposes of the statutory residence test, which determines whether an individual is resident in the UK (as a whole) in a given tax year. 

In some cases individuals with more than one residence available to them may have elected for one of these properties to be their main residence for capital gains tax purposes, with the result that an exemption from capital gains tax should be available to all or part of any gain arising on disposal of the property. The main residence election is irrelevant when considering which property is the main residence for the purposes of Scottish income tax. The main residence is determined based on the facts.

As Scottish residence is normally determined based on where individuals have their homes, individuals may work in a different UK jurisdiction to the one in which they are resident for tax purposes. For example, an individual who commutes from their Scottish home to a job in England may be tax resident in Scotland. 

If an individual is UK resident in a tax year and is a Scottish taxpayer, Scottish taxpayer status applies for the entire year even if they live in other part of the UK for a substantial part of the year (i.e. there is no way of splitting the year). A non-UK resident individual cannot be a Scottish taxpayer. If an individual comes to or leaves the UK during the tax year and is able to split the tax year into a UK part and an overseas part for UK income tax purposes, Scottish rates will apply for the whole year. Although the individual is broadly taxed as though they were non-UK resident in the overseas part of the tax year, they are strictly UK resident throughout, so Scottish taxpayer status remains engaged. This only has an effect to the extent that the individual has income that is subject to SRIT in the overseas part of the year.

Tax collection 

Income tax which is due at Scottish rates is payable to HMRC and the tax collected is subsequently redistributed to Scotland. 

Income tax is collected on employment and pension income throughout the year through PAYE. The amount of tax deductible by employers and pension providers and payable to HMRC is calculated based on each individual’s PAYE code, which is used to determine the available personal allowance and applicable tax rate. An ‘S’ prefix is added to the tax codes of Scottish taxpayers. The payer’s payroll software should apply the appropriate rates once this code is entered.

Individuals who complete self assessment returns are required to use the appropriate rates when calculating their income tax liability for the year. Although the liability is self-assessed, HMRC may issue “corrections” to computations that conflict with their records of Scottish residence status (e.g. a computation showing Scottish rates if they believe that the individual was a Scottish taxpayer but the return was filed using the main UK rates). HMRC generally base their records on the individual’s home address on their system. Although this gives the correct result in most cases, it is too simplistic to deal with all circumstances. If a PAYE code or other HMRC record indicates that HMRC believe a Scottish resident is non-Scottish resident (or vice versa), they should be advised of the discrepancy at the earliest opportunity.