The Scottish Government’s finance secretary announced in the Scottish budget speech on 14 December 2017 (the “Scottish Budget”) that a new five-band income tax system will apply to Scottish resident taxpayers, with effect from 6 April 2018. The new income tax bands are:

  • Income between £0 and £11,759 - 0%
  • Income between £11,850 and £13,850 - 19%
  • Income between £13,851 and £24,000 - 20%
  • Income between £24,001 and £44,273 - 21%
  • Income between £44,274 and £150,000 - 41%
  • Income of £151,000 or more - 46%

The new rates will apply only to income from employment and pensions. The rates of income tax generally applicable to taxpayers resident in parts of the UK other than Scotland, will continue to apply to taxpayers resident in Scotland in so far as the income in question arises from savings or consists of dividends. This will be the case even where such income is derived via vehicles such as a Scottish limited partnership.

For employees, income tax is automatically deducted from their salaries. If the tax “code” allocated to an employee begins with “S”, then the employer or pension provider should deduct income tax at the Scottish rates. In relation to individuals who complete a self-assessment tax return, there is a box on the return to inform HM Revenue and Customs that income tax is payable at Scottish rates.

Specific tests must be applied to determine whether a taxpayer is resident in Scotland or resident elsewhere in the UK and HM Revenue and Customs has issued guidance on the application of these tests. It should be noted that the location of a taxpayer’s place of employment is not conclusive as to the taxpayer’s place of residence.