It is probably common knowledge by now that, come April 2016, the regulations that implement the Scottish rate of income tax (SRIT) will come into force, says Diana Bruce of the CIPP.
HMRC has published some updates recently so we have a few more details that should help to administer the new tax whether running employee or pension payrolls.
From 6 April 2016, the income tax rates set by the UK government that apply to the ‘rest of the UK’ (rUK) will be reduced by 10p in the pound for Scottish taxpayers, and increased by the SRIT. The Scottish government is due to announce the SRIT in November 2015. We know that the basic, higher and additional earnings bands are to remain the same for both rUK and SRIT for the tax year 2016-17.
Scottish taxpayer status
A Scottish taxpayer is someone who is resident in the UK for tax purposes and who has his or her sole or main place of residence in Scotland for all or most of the tax year, rather than in another part of the UK. The employer’s location is of no relevance, it is the individual’s location that determines tax status so all employers will have to operate Scottish tax codes, irrespective of their location.
HMRC will identify those individuals who will be Scottish taxpayers, not employers, and for most people this will be very simple. However, for those with more complex living arrangements, guidance will be published on GOV.UK later this year.
Scottish taxpayers will have their tax codes prefixed with the letter ‘S’. This parameter has been included in RTI specifications for some years, although previously known as the Scottish Variable Rate (SVR). HMRC systems will assess and assign the appropriate tax code after the first full payment submission (FPS) is received, using information they hold at that time. HMRC will then notify the employer of the correct tax code to use. There will be no Scottish emergency tax code so, where an emergency tax code is appropriate, the rUK emergency tax code is to be used. There will also be no Scottish equivalent of the NT tax code.
In-year notifications will be issued where an employee notifies HMRC of their change of address that changes their taxpayer status and tax code. A change from a Scottish code to a UK code (or vice versa) does not change the calculation method. The only difference is whether it is the UK or Scottish rate being applied. The change of tax basis is also actioned in the normal way.
The current process for week 1/month 1 will continue and will not be impacted by SRIT. HMRC will advise employers which tax code to apply, and this should be applied to the employees’ income for the year to date. Any resulting under or over-payments will usually be corrected during the year using current processes or, if the tax year end has passed, corrections will made by HMRC as part of the normal year-end reconciliation process.
From 6 April 2015, the 50% overriding regulatory limit for PAYE deductions applies to all tax codes, so that an employee’s tax deduction for a pay period cannot be more than 50% of their pre-tax pay or pension. The 50% regulatory limit will be applied to both rUK and SRIT calculations.
HMRC will publish Scottish tax tables so that the correct tax deduction can be made in the same way as for existing tax codes/tax tables.
In June, HMRC announced that there would no longer be a requirement to show the SRIT element separately on the P60 certificate. This decision was made following consultation with stakeholders, including the CIPP, and we were very pleased that our concerns were listened to. However, the P60 will still have to show a Scottish tax code, where appropriate. HMRC will show the SRIT proportion separately on the individual’s annual tax summaries from the 2016-17 tax year onwards.
Payroll software will not be required to split and report SRIT amounts in full payment submissions (FPS). SRIT will be reported separately through internal HMRC PAYE processes on an individual level so there will be no impact or change on FPSs other than incorporating the new Scottish tax regime indicator.
While there is no requirement to include the Scottish Rate amount separately on payslips, HMRC will continue working with employers on how best to ensure employees have visibility and understanding of the Scottish rate of income tax.
Starters and leavers
Form P45 will allow the Scottish tax code prefix to be displayed. Scottish taxpayer status applies for a full tax year so, depending on when an individual moves, their taxpayer status may not change until the end of the tax year in question (discussed above).
If an individual changes employment during the tax year, as with current processing, employers should continue to operate the tax code shown on the P45. If you do not have P45, or are unsure which tax code to use, you should use the rUK tax code and rate unless you receive a notification from HMRC stating otherwise.
There are no changes to the employee declaration, or starter’s checklist, (previously form P46) for SRIT. As HMRC will determine taxpayer status, there are no plans to amend or add a question to the declaration specifically for Scottish taxpayers.
There are also no changes to leaver processes as a result of SRIT. Payments after leaving for Scottish taxpayers will be processed using the tax code S0T on a week 1/month 1 basis. This will also apply where the payment after leaving is in the following tax year.
Pension schemes operating the net pay arrangement
HMRC will have told employers which of their employees are Scottish taxpayers in order to collect the correct PAYE on earnings. Where contributions are paid to a pension scheme that operates the net pay arrangement (earnings paid net of tax relief), HMRC would expect the Registered Pension Scheme Administrators (RPSA) to tell their members in advance that the amount they have to pay is changing due to the appropriate rate of Scottish rate in place at that time. Employers will have to adjust their payroll systems to collect the right amount.
Pension schemes operating relief at source
It should be noted that the government has agreed that Registered Pension Scheme Administrators/Pension Providers can continue to claim relief at source at the rUK basic rate for all members from April 2016, irrespective of any difference between the Scottish & rUK basic rates. HMRC will make any adjustment (based on the rate set by the Scottish government) to the relief given directly with scheme members who are Scottish taxpayers through the self assessment process or through PAYE coding.
One final comment is that although there is currently no legislation in place that states employees must keep HMRC informed of a change in address, HMRC do stress at every opportunity that any changes in personal circumstances should be reported to them as soon as possible. The benefit being, of course, that the change could affect an employee’s tax code, so keeping them informed will help to keep tax codes and status in ‘real time’.
Diana Bruce is senior policy liaison officer at the CIPP.