Scottish income tax

From 6 April 2017, the Scottish Government were given powers to set a Scottish rate of income tax which applies to any non-savings/non-dividend income for those deemed to be Scottish taxpayers. These rates apply to an individual’s earned income, pension and most other taxable income.

For any savings income, including dividend income and bank savings, a Scottish taxpayer will use the same tax bands and allowances as the rest of the UK. These rates and bands will still be set by the UK Government, as are any other allowances or reliefs such as the personal savings allowance and starting rate for savings band.

Additionally, it is the UK tax bands which are used to determine the rate of capital gains tax an individual pays on any taxable gains.

Anyone who lives in Scotland during a tax year, and is resident in the UK for tax purposes, may be a Scottish taxpayer and pay Scottish income tax to the Scottish Government.

This will apply to their entire tax year. There are no provisions for split year treatment.

If the number of days they spend in Scotland is the same as, or more than, the number of days spent elsewhere in the UK, they will be a Scottish taxpayer for that tax year.

If someone moves to or from Scotland during the year, HMRC will class them as a Scottish taxpayer if they live there for more than half the tax year.

Example: Moving to Scotland

• Martin rented and lived in a house in Birmingham for a number of years.
• On 30 June, he moved to a flat in Aberdeen and remained there for the rest of the tax year.
• The time he spent in Scotland during the tax year (1 July to 5 April) was for more than six months.
• He was therefore treated as a Scottish taxpayer for the whole tax year.

Example: Moving from Scotland

• Harold was living in Glasgow at the start of the tax year.
• On 6 July he moved to Manchester, before moving to Bristol on 6 November.
• He lived in Scotland for four months of the year, and in England for the remaining eight months.
• He was therefore not treated as a Scottish taxpayer in that year.

Individuals who do not live in Scotland, will not be a Scottish taxpayer; even if they regard themselves as being Scottish, work in Scotland, are paid by a Scottish employer or pension provider, or travel to Scotland frequently.

Where someone has more than one home, that is, one in Scotland and another elsewhere in the UK, their main home will usually be where they spend most of their time. It doesnʼt matter whether they own, rent, or live in it for free. Their main home may even be the home where they spend less time, which is particularly relevant for those who live away because of work; for example a lorry driver, an o shore worker, the armed forces etc., if that is where:

• most of their personal possessions are
• their family lives, if they are married or in a civil partnership
• they are registered for things like a bank account, GP, insurance and so on • they are members of clubs or societies in that area

If in any doubt, the individual should speak with HMRC to confirm whether they will be treated as a Scottish taxpayer based on their situation.

For 2024/25 Scottish income tax is paid on the amount of taxable non-savings, non-dividend income using the following bands and rates.

Whenever the income tax legislation refers to a ʻhigher rate taxpayerʼ or the ʻhigher rate thresholdʼ for the purposes of determining most other aspects of tax, the UK threshold will apply.

*this amount varies depending on how much personal allowance an individual has.

This is reduced by £1 for every £2 of income over £100,000 and applies to all UK and Scottish taxpayers.

The amount of PSA an individual is entitled to is dependent on their tax situation. It is:

• £1,000 for a non-taxpayer and a basic rate taxpayer
• £500 for a higher rate taxpayer
• Nil for an additional rate taxpayer

When determining the amount of PSA that applies for Scottish taxpayers, the UK higher rate threshold is used.

It is therefore possible for someone to be a higher rate taxpayer for Scottish income tax purposes, but below the UK higher rate threshold. In that case, a higher rate Scottish income taxpayer may still be entitled to a PSA of £1,000.

As Scottish income tax does not apply to savings income, the Scottish tax rates and bands will not apply when calculating chargeable event gains on investment bonds. Instead the UK tax rates and bands are used.

Example:

Joey pays Scottish income tax on his annual pension income of £53,000.

In September 2023, Joey realises a chargeable event gain on a UK investment bond of £24,000 he had held for 4 complete years. He needs to use the UK basic rate threshold of £37,700 to calculate the income tax payable on his chargeable gain:

Once the chargeable gain is added, Joey's income is £77,000 (pension income of £53,000 + chargeable gain of £24,000).  This means:

• there is no reduction in Personal Allowance (PA) as Joey’s income is not more than £100,000
• Joey's Personal Savings Allowance (PSA) will reduce to £500
• the majority of the chargeable gain will be taxed at 40%. Joey is already a higher rate taxpayer (UK and Scotland) before the chargeable gain is added, but top slicing relief is available to the extent that the chargeable gain falls into the PSA.  The 5 step top slicing calculation should be carried out
• Joey's PA is set against his pension income in the top slicing calculation
• the bond is offshore and does not have a basic rate tax credit

Step 1: Calculate the total taxable income for the year.

*Allowances and rates already set against non-savings, non-dividend income.

Income tax on £53,000 pension income = £10,288

Income Tax on £24,000 Chargeable Gain = £9,400

Step 2: Calculate the total tax due on the gain across all tax bands.

Deduct basic rate tax treated as paid to find the individual’s liability for the tax year. This applies to both onshore and offshore bonds for the purposes of the top slicing calculation:

Tax due £9,400

less

Tax credit (tax treated as paid = £24,000 @ 20% = £4,800)

Total tax due = £4,600

Step 3: Calculate the annual equivalent (slice) of the gain:

£24,000 gain / 4 full years = £6,000 slice

Step 4: Calculate the individual’s liability to tax on the annual equivalent (slice)

For the purposes of this calculation, we add Joeyʼs pension income of £53,000 to the £6,000 annual equivalent of the gain which gives income of £59,000.

• As this is less than £100,000, the full Personal Allowance will be available
• Joey is already a higher rate taxpayer (UK and Scotland) before the chargeable gain is added, but top slicing relief is available to the extent that the chargeable gain falls into the PSA

Total income tax                                                                                                        £10,288                                                                                                                                                           £2,200                     

*Allowances and rates already set against non-savings, non-dividend income.

Total tax on top sliced gain = £2,200

Less tax credit (tax treated as paid on the annual equivalent = £6,000 @ 20% = £1,200

Total relieved liability on top slice: (£2,200 - £1,200) = £1,000 x 4 years = £4,000

Step 5: Calculate top slicing relief and total income tax due on the gain after top slicing relief applied.

Top slicing relief is the difference between the total liability at Step 2 and the total relieved liability at Step 4:

Scottish taxpayers suffer the same tax as the rest of the UK on dividends and savings interest, capital gains tax, chargeable gains on life policies and inheritance tax. The introduction of Scottish income tax adds a layer of complication, so a Scottish taxpayer who has both earned income, and taxable savings should consider both the UK and Scottish rates and thresholds to calculate their total income tax liability.

It is important that advisers are aware of how this affects the income a client receives from various sources and highlights the importance of working with the client’s accountant.

Further information is available: https://www.gov.scot/publications/scottish-income-tax-2024-2025-rates-and-bands/