Barely will the May 7 election have taken uncertainty to a new level than policy attention in Scotland will swing towards “more powers”. Here tax expert DAVID COLLIER provides a valuable aide memoire on what now lies in store.
What is in store? How will they affect households and businesses? What can we do to plan ahead?
The UK has devolved some tax powers to the Scottish Parliament. Following the Scottish Referendum in 2014 the UK government set up the Smith Commission. The subsequent consensus of the main UK political parties was embodied in the Smith Commission Agreement, which includes proposals for a further transfer of tax powers to the Scottish Parliament.
Some income tax powers have already been transferred to Scotland, with others already agreed from 2016, and further transfers envisaged by the Smith Commission Agreement. These are detailed below.
- From 1 April 2015, SDLT has been replaced in Scotland with Land and Buildings Transaction Tax. Scottish Landfill Tax will also be introduced.
- The Aggregates Levy and Air Passenger Duty will be devolved to Scotland.
- There are no proposals to devolve corporation tax, inheritance tax or VAT. Some of the UK’s VAT receipts will however be allocated to the Scottish Budget in place of part of the block grant.
Income Tax: Scottish Variable Rate
The Scottish Parliament was granted the power to vary the basic rate of income tax by up to three percentage points under the Scottish Variable Rate (SVR). The power under the SVR has not been exercised, and is being abolished in favour of the Scottish Rate of Income Tax, below.
Income Tax: Scottish Rate Of Income Tax
From April 2016, the SVR powers will be replaced by a Scottish Rate of Income Tax (SRIT). The SRIT will operate in the following way-
- Each of the (UK) rates of income tax (the basic rate, higher rate and additional rates- currently 20%, 40% and 45%) will be reduced by 10%.
- The UK rates, as reduced, will then be increased by the SRIT as determined by the Scottish Parliament.
The Scottish rate of SRIT must be the same for each of the income tax bands (the “lockstep”).
Scottish income tax, under SRIT, will apply to “Scottish taxpayers”. In outline, a Scottish taxpayer is a UK resident individual whose place of residence is in Scotland for the majority of the tax year.
The rates of income tax, as varied by the SRIT, for Scottish taxpayers-
- would apply to income from employment, self-employment, pensions and rental income.
- would not apply to savings and dividend income.
Income tax: Rate setting under the Smith Commission Agreement
The Smith Commission Agreement proposes that the lockstep under SRIT is abolished, giving the Scottish Parliament power to set all of the rates of income tax. This would still apply to the income described above of Scottish taxpayers.
The tax and other aspects of the Smith Commission Agreement were included in a Scotland Bill, which will have its second reading in the UK Parliament after the 2015 UK General Election. The tax year from which the lockstep will be abolished will be determined at a later date.
The UK Parliament will continue to set-
- The level of the personal allowance.
- As noted, the rates of tax on savings and dividend income for both Scottish and non-Scottish taxpayers
- Tax reliefs and the general structure of income tax.
Capital gains tax
The rate of capital gains tax (CGT) will continue to be set by the UK Parliament. The rate of CGT for a Scottish taxpayer will be calculated by reference to the UK income tax rates and therefore the threshold at which the 28% rate is payable will be when their income exceeds the UK income tax higher rate threshold.
POINTS TO NOTE
- HMRC will continue to administer income tax in Scotland as well as other parts of the UK. It will apply the Scottish rates to Scottish taxpayers on their non-savings income and UK rates to the savings income of Scottish taxpayers.
- There is no double tax involved in the proposals. For instance, the rules will not attempt to identify Scottish source income of non-Scottish taxpayers, nor non-Scottish income of Scottish taxpayers. Each UK resident will be either a Scottish taxpayer or not for a tax year, and this will be the sole determinant of what rate applies to that individual for that year.
- The rules relating to the application in Scotland of Gift Aid and pension tax relief at source (both of which relate to the basic rate of tax) are not yet decided.
ADDITIONAL COMMENTS ON THE SCOTTISH RATE OF INCOME TAX
The possibility of a difference between the basic rate of tax in Scotland and elsewhere in the UK raises practical difficulties in a number of areas. The following is a summary of the currently intended approach, as announced by HMRC-
Pension tax relief: occupational schemes. Under net pay arrangements for occupational schemes, pension contributions are deducted from pay before income tax is calculated under PAYE. This mechanism will give tax relief for Scottish taxpayers at Scottish rates.
Pension tax relief: other schemes. Under other arrangements such as personal pensions and SIPPs, contributions are treated as paid net of basic rate tax. The pension scheme reclaims the tax from HMRC; higher rate and additional rate taxpayers can reclaim further tax relief through self-assessment. On the introduction of Scottish rate tax it is likely, as an interim measure that pension schemes will continue to reclaim tax at UK basic rate for Scottish taxpayers. HMRC will make suitable adjustments for Scottish taxpayers through self-assessments or PAYE.
Charitable gifts. Gifts to charities under Gift Aid are deemed to have been made under deduction of basic rate tax. The charity can claim repayment of the tax deducted; the donor can claim any further tax relief if he is liable to the higher or additional rate of tax. Charities will continue to claim repayment at UK basic rate, irrespective of whether the donor is a Scottish taxpayer; Scottish taxpayer donors will claim any further tax relief by reference to Scottish rates of tax.
Interest in possession trusts. Income from interest in possession trusts is paid under deduction of basic rate tax. The deduction will be made at the Scottish basic rate of tax where the beneficiaries are Scottish taxpayers. Similar principles will apply to income from the estates of deceased individuals.
Income from Real Estate Investment Trusts (REITs) and Private Ancillary Funds (PAFs). Some income from REITs and PAFs is treated for tax purposes as property income. These property income distributions are made under deduction of basic rate tax. The deduction will be made at the UK basic rate for all recipients. The income will be chargeable to Scottish rates if the recipient is a Scottish taxpayer.
David Collier is a long-standing tax and financial expert. His article is designed to give a brief summary of relevant rules, as known at the date of issue.
Advice should be sought in relation to individual circumstances.