Scottish Taxpayers - Are you using the right tax code?

With effect from 6 April 2017 the Scottish Parliament has exercised its limited rights to vary income tax rates for Scottish taxpayers. 

This means that residents of Scotland now have a different, lower, threshold for the 40% rate of tax for all income sources apart from dividends or interest.  

For employers, this means that since the start of 2017/18 any Scottish employees need to be identified on the payroll so that the correct tax code is used.  If not, insufficient tax may be taken at source.  A Scottish taxpayer will have a coding notice starting with an S.  They will then, assuming full entitlement to the personal allowance of £11,000 and no other coding adjustments, start paying higher rates of tax on salary from £43,000 rather than £45,000.  Don’t forget these rates will not just affect salary, but also any calculations prepared under PAYE settlement agreements. 

A person is a Scottish taxpayer based on where they live, not where their employer is based, so this is a payroll issue that could affect any employer in the UK with a Scottish resident employee.

It is important when your staff move home that they keep HMRC updated.  Employees can notify HMRC of address changes through their Personal Digital Accounts or following guidance from HMRC here. 

Individuals overseas using a Scottish address

We issued a press release  in May for people using a Scottish address who are working overseas.  HMRC is classifying people as Scottish based on their correspondence address.  However to be classified as Scottish, you first need to be UK resident.  A non-UK resident cannot be classified as a Scottish taxpayer, and will not be affected by the Scottish thresholds.

In most circumstances this should not be an issue for employers, as they will not generally be deducting tax from a non-resident employee.  However there are cases where this could occur, and care should be taken.