Scottish Income Tax

Scottish Income Tax rates will be the same as rates for the rest of the UK for the 2017/2018 tax year, which begins on 6 April 2017. However, the threshold for higher rate tax (40%) in Scotland will be £43,000, which compares to £45,000 for the rest of the UK.
We’ve set out some questions and answers below to help our customers understand a bit more about this:

What is Scottish Income Tax?

The Scottish Parliament has the power to set annual rates and bands of Income Tax for Scottish taxpayers from April 2017. Scottish Income Tax is paid on earned income only, not income from savings or dividends.

Who does it affect?

It only applies to people who are defined as Scottish taxpayers, by HM Revenue and Customs (HMRC).  This means people who are resident in the UK for tax purposes and whose sole or main place of residence is in Scotland for all or most of the tax year, rather than in another part of the UK

How do I know if I’m a Scottish taxpayer?

HMRC will write to you if they think you might be a Scottish taxpayer. If you’ve recently moved to Scotland and you haven’t heard from HMRC yet, you should contact them directly – we can’t do this for you.
If HMRC decide that you’re a Scottish taxpayer, your PAYE code will contain an ‘S’ prefix.

I’m Scottish but I live in England / Wales / Northern Ireland. Will this affect me?

No, it only affects you if you’re a Scottish taxpayer. Scottish people who do not reside in Scotland are not Scottish taxpayers.  If you have a home in Scotland and a home elsewhere in the UK, it will be up to HMRC to determine whether you’re classed as a Scottish taxpayer or not.

Is Scottish Income Tax different from the rate of income tax in the rest of the UK?

The Scottish Parliament has the power to set its own rates and bands of income tax, but not personal allowances. In 2017-2018 the only difference between Scottish and UK income tax is that the higher rate threshold starts at a lower level of income than the threshold that applies in the rest of the UK. Both Parliaments set income tax rates and bands each year and other differences could emerge in the future.

2017 / 2018 Income Tax rates:

  Scotland Rest of the UK
Basic rate 20% Over £11,500* – £43,000 Over £11,500* – £45,000
Higher rate 40% Over £43,000 – £150,000 Over £45,000 – £150,000
Additional rate 45% Over £150,000 and above** Over £150,000 and above**

*Assumes individuals are in receipt of the Standard UK Personal Allowance.
**Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

How will the Scottish Income Tax affect the tax relief I get on my personal pension contributions?

UK basic rate tax relief of 20% is applied to contributions into personal pension. If you’re a Scottish taxpayer, tax relief will continue to be applied to your contributions at the UK basic rate up until 2018, and from 2018 at the Scottish basic rate.
Higher or additional rate taxpayers will still have to claim further tax relief from HMRC, as they do now. However, as the higher rate threshold is lower than in the rest of the UK in 2017-2018, some Scottish taxpayers may be able to claim more tax relief on their pension contributions than taxpayers in the rest of the UK.

How will Scottish Income Tax affect the tax relief I get on my occupational pension contributions?

In most occupational pensions, contributions are deducted from your earnings by your employer, before income tax is calculated. This means you normally receive your full amount of tax relief up front under PAYE, with the amount of relief obtained dependent on whether you’re a basic, higher or additional rate tax payer. If you’re classed as a Scottish taxpayer you’ll receive tax relief at Scottish rates. However as the higher rate threshold is lower than in the rest of the UK in 2017-2018, some Scottish taxpayers will obtain more tax relief on their pension contributions than taxpayers in the rest of the UK.

How will Scottish Income Tax affect the tax relief I get on my Section 226 (S226) Retirement Annuity Contract?

When you pay contributions into an S226 policy, tax relief isn’t automatically added to any portion of your policy, as it is with some other types of pensions. Instead, you need to claim all your tax relief back from HMRC. As the higher rate threshold is lower than in the rest of the UK in 2017-2018, some Scottish taxpayers will obtain more tax relief on their pension contributions than taxpayers in the rest of the UK.

How will Scottish Income Tax affect tax on my annuity income or drawdown income?

Currently, annuity payments and drawdown payments are taxed in the same way as income, at UK income tax rates. If HMRC tell us that you’re a Scottish taxpayer, your annuity or drawdown payments will be taxed at Scottish rates.

How will Scottish Income Tax affect tax on my lump sum?

Currently, if you take your pension as a lump sum, 25% will be tax-free with the remainder taxed in the same way as income, at UK income tax rates. If HMRC tell us that you’re a Scottish taxpayer the first 25% of your small pot or lump sum will still be tax-free, but the remainder will be taxed at Scottish rates.

How will Scottish Income Tax affect tax on withdrawals from my Retirement Account?

As you know, your Retirement Account is split into two pots; the Flexible Pension Pot and the Flexible Drawdown Pot.
Currently, each withdrawal from your Flexible Pension Pot has a tax-free element of up to 25%, with the remaining portion taxed in the same way as income, at UK income tax rates. 100% of each withdrawal from your Flexible Drawdown Pot is taxed at UK income tax rates.
If HMRC tell us that you’re a Scottish taxpayer, any income tax you pay on Retirement Account withdrawals will be set at Scottish rates.

Does it matter where my pension provider is based?

No. If you live in Scotland then you will usually be a Scottish taxpayer. If you live in England, Wales or Northern Ireland, you will usually be taxed on a rest of the UK basis. It doesn’t matter what part of the UK your pension provider is based in.  Although we are based in England, Scottish taxpayers will be subject to the Scottish Rate of Income Tax.

Where can I find out more information?

On the Scottish Government website, at www.gov.scot/incometax. You can also find information on the UK government website by visiting www.gov.uk