One rate, but lots of change One rate, but lots of change

One rate, but lots of change
28 Feb 2016

You could be forgiven for thinking that since the rate of SRIT was announced as 10% on 16th December that all the hype about the new tax regime is just that and that there is now nothing for payroll teams to be concerned about.

However, the rate is only half the story. This article will explore the operational changes that the implementation will bring from April this year.

What was the Scotland Act 2012?

The Scotland Act 2012 gave the Scottish government the power to set the variable rate of income tax. This is nothing new, The Scotland Act 1998 introduced the Scottish Variable Rate or SVR, so payroll systems have been able to accommodate a different rate of income tax for Scottish taxpayers since 2000 but it was never introduced. The Scotland Act 2012 repealed SVR and the Scottish Rate of Income Tax (SRIT) was created. SRIT applies to earnings but not savings or investment income and Is introduced from the 2016/17 tax year.

The Act requires the Scottish government to set a single rate, either a full percentage or half percentage, before the start of each tax year. Scottish rates of tax will then be calculated by deducting 10 from each of the rest of the UK rates and replacing this with the SRIT so that the two combined figures become Scottish tax rates for the year.

For example, if the Scottish government set the rate at 9% for 2017/18, the steps in the calculation would be:

• Deduct ten from each of the rest of the UK rates to give 10%, 30% and 35%

• Add the SRIT of 9% to each of these rates to give 19%, 39% and 44%

There is a tax calculator available to see the impact of the changes

What if the Scottish budget is late?

If the Scottish budget is set late the same provisions exist as for the rest of the UK currently - that is the rates from the previous tax year continue until tax week seven/ month two of the new tax year when the new rates can be implemented. Equally the Scotland Act allows the SRIT to be in force from 6 April and to be retrospectively backdated once the primary legislation is given Royal Assent.

Which employers are affected by the SRIT?

Any organisations that employ ‘Scottish taxpayers’ regardless of where the organisation is based or has it operations will be affected by these changes.

Who is a Scottish taxpayer?

An individual will be a Scottish taxpayer if they are:

• UK resident for income tax purposes and

• Either:

o Has a close connection with Scotland based on the location of their place of residence; or o Does not have a close connection with England, Northern Ireland, Scotland or Wales based on place of residence and spends at least as many days in Scotland as in the rest of the UK combined.

So expats who are not tax resident in the UK can never be Sottish taxpayers.

What this means in practical terms is HMRC will, in some situations, have to count the number of days spent in each of the four parts of the UK in order to establish whether an individual is a Scottish tax resident. Where there is a ‘tie break’ of ‘close connection’ days the default is to be classed as a Scottish taxpayer

If you have more than one home in a year you can only be a rest of UK taxpayer or a Scottish taxpayer for a full tax year so which ever takes precedence for the year that rate of tax will apply for the full year. Where there is a need to amend liability HMRC will deal with this in their post year-end reconciliation.

How do HMRC know where employees live?

Since April 2015 HMRC has been collecting all employee addresses whenever they are supplied on RTI submissions. This has helped them to establish there are 2.2 million Scottish taxpayers. HMRC wrote to these taxpayers in mid December confirming that they were to be classed as Scottish taxpayers for the 2016/17 tax year.

It should be noted that SRIT taxpayers will not receive a P2 notice of coding for the new tax year unless other circumstances have changed to generate the coding. So this could mean some queries in April.

If anyone wishes to challenge their SRIT status then direct them to this information page.

When will employers get to know about Scottish taxpayers?

Individual tax codes will be issued as part of the annual coding run during February. The codes will be prefixed with an S for example S1100L or SK100 and so will enable the payroll software to direct that the employee will be subject to Scottish tax calculations rather than rest of UK. When setting up a new starter there will be no Scottish emergency code, all new starters who present with a starter checklist only will be deemed to be rest of UK unless, and until, HMRC tells the employer differently. Only if the P45 is presented with a Scottish tax code should this continue to be used at the new employment.

What happens when a rest of UK tax code is converted to a Scottish tax code?

As long as the code is cumulative the payroll system will convert the tax that has already been paid into what would be due under SRIT for the earnings at that point. If the code is non-cumulative, the previous tax will be left as it is and the year-end reconciliation will be undertaken HMRC.

What about leavers?

Payments after leaving will be calculated using the tax code S0T.

Is there anything else to consider?

Yes, if you operate a PAYE settlement agreement (PSA) and have Scottish taxpayers two agreements for 2016/17 will be needed as the two different groups have to be reported separately so HMRC can direct the correct tax to the Scottish government from the PSA.

As far as pension contributions are concerned it will depend on the type of pension scheme and tax relief operated. For a net pay arrangement scheme the correct tax relief will be offered to the individual, however for a relief at source scheme the pension provider has until 6th April 2018 to amend their systems to reflect the correct rate of SRIT. But as the rate is the same for 2016/17 this will not prove to be a problem and the correct tax relief for this year can be claimed from HMRC at year-end.

By Kate Upcraft

You could be forgiven for thinking that since the rate of SRIT was announced as 10% on 16th December that all the hype about the new tax regime is just that and that there is now nothing for payroll teams to be concerned about.

However, the rate is only half the story. This article will explore the operational changes that the implementation will bring from April this year.

What was the Scotland Act 2012?

The Scotland Act 2012 gave the Scottish government the power to set the variable rate of income tax. This is nothing new, The Scotland Act 1998 introduced the Scottish Variable Rate or SVR, so payroll systems have been able to accommodate a different rate of income tax for Scottish taxpayers since 2000 but it was never introduced. The Scotland Act 2012 repealed SVR and the Scottish Rate of Income Tax (SRIT) was created. SRIT applies to earnings but not savings or investment income and Is introduced from the 2016/17 tax year.

The Act requires the Scottish government to set a single rate, either a full percentage or half percentage, before the start of each tax year. Scottish rates of tax will then be calculated by deducting 10 from each of the rest of the UK rates and replacing this with the SRIT so that the two combined figures become Scottish tax rates for the year.

For example, if the Scottish government set the rate at 9% for 2017/18, the steps in the calculation would be:

• Deduct ten from each of the rest of the UK rates to give 10%, 30% and 35%

• Add the SRIT of 9% to each of these rates to give 19%, 39% and 44%

There is a tax calculator available to see the impact of the changes

What if the Scottish budget is late?

If the Scottish budget is set late the same provisions exist as for the rest of the UK currently - that is the rates from the previous tax year continue until tax week seven/ month two of the new tax year when the new rates can be implemented. Equally the Scotland Act allows the SRIT to be in force from 6 April and to be retrospectively backdated once the primary legislation is given Royal Assent.

Which employers are affected by the SRIT?

Any organisations that employ ‘Scottish taxpayers’ regardless of where the organisation is based or has it operations will be affected by these changes.

Who is a Scottish taxpayer?

An individual will be a Scottish taxpayer if they are:

• UK resident for income tax purposes and

• Either:

o Has a close connection with Scotland based on the location of their place of residence; or o Does not have a close connection with England, Northern Ireland, Scotland or Wales based on place of residence and spends at least as many days in Scotland as in the rest of the UK combined.

So expats who are not tax resident in the UK can never be Sottish taxpayers.

What this means in practical terms is HMRC will, in some situations, have to count the number of days spent in each of the four parts of the UK in order to establish whether an individual is a Scottish tax resident. Where there is a ‘tie break’ of ‘close connection’ days the default is to be classed as a Scottish taxpayer

If you have more than one home in a year you can only be a rest of UK taxpayer or a Scottish taxpayer for a full tax year so which ever takes precedence for the year that rate of tax will apply for the full year. Where there is a need to amend liability HMRC will deal with this in their post year-end reconciliation.

How do HMRC know where employees live?

Since April 2015 HMRC has been collecting all employee addresses whenever they are supplied on RTI submissions. This has helped them to establish there are 2.2 million Scottish taxpayers. HMRC wrote to these taxpayers in mid December confirming that they were to be classed as Scottish taxpayers for the 2016/17 tax year.

It should be noted that SRIT taxpayers will not receive a P2 notice of coding for the new tax year unless other circumstances have changed to generate the coding. So this could mean some queries in April.

If anyone wishes to challenge their SRIT status then direct them to this information page.

When will employers get to know about Scottish taxpayers?

Individual tax codes will be issued as part of the annual coding run during February. The codes will be prefixed with an S for example S1100L or SK100 and so will enable the payroll software to direct that the employee will be subject to Scottish tax calculations rather than rest of UK. When setting up a new starter there will be no Scottish emergency code, all new starters who present with a starter checklist only will be deemed to be rest of UK unless, and until, HMRC tells the employer differently. Only if the P45 is presented with a Scottish tax code should this continue to be used at the new employment.

What happens when a rest of UK tax code is converted to a Scottish tax code?

As long as the code is cumulative the payroll system will convert the tax that has already been paid into what would be due under SRIT for the earnings at that point. If the code is non-cumulative, the previous tax will be left as it is and the year-end reconciliation will be undertaken HMRC.

What about leavers?

Payments after leaving will be calculated using the tax code S0T.

Is there anything else to consider?

Yes, if you operate a PAYE settlement agreement (PSA) and have Scottish taxpayers two agreements for 2016/17 will be needed as the two different groups have to be reported separately so HMRC can direct the correct tax to the Scottish government from the PSA.

As far as pension contributions are concerned it will depend on the type of pension scheme and tax relief operated. For a net pay arrangement scheme the correct tax relief will be offered to the individual, however for a relief at source scheme the pension provider has until 6th April 2018 to amend their systems to reflect the correct rate of SRIT. But as the rate is the same for 2016/17 this will not prove to be a problem and the correct tax relief for this year can be claimed from HMRC at year-end.

By Kate Upcraft