At the moment, the Scottish Parliament has tax varying powers with power to increase or decrease income tax for Scottish taxpayers by 3p in the pound. New rules contained in the Scotland Act 2012 which are set to be introduced from April 2016 will see 10% removed from the UK rate of income tax for Scottish tax payers with the Scottish Parliament having power to substitute its own rate on non savings and non dividend income. If the Scottish rate is 10% then Scottish taxpayers will therefore pay the same aggregate rate of income tax as taxpayers south of the border.
Although under the proposals income tax will remain a shared tax between the UK and Scottish Parliaments, the Smith Commission has recommended that the Scottish Parliament should have complete power to set the rates of income tax and the thresholds at which these are paid, for the non savings and non dividend income of Scottish taxpayers.
Income tax would continue to be collected and administered for the whole of the UK by HM Revenue & Customs but the Scottish Government will receive all income tax paid by Scottish taxpayers on their non savings and non dividend income. The personal allowance and the taxation of savings and dividend income as well as the ability to introduce and amend tax reliefs would remain reserved to the UK Parliament. This includes tax reliefs which apply to pensions.
National Insurance Contributions, Inheritance Tax, Capital Gains Tax and Corporation Tax will all remain reserved to Westminster. The taxation of oil and gas will also remain reserved.
The Scottish Government will receive a proportion of VAT raised in Scotland (amounting to the first 10 percentage points of the standard rate (i.e. with the present rate being 20%, Scotland would receive 50%). Westminster retains the right to set the UK's rate.
What happens next?
A new draft Scotland Bill is to be published by the end of January, which will then be presented for UK Parliamentary approval. It is anticipated that legislation will be passed after the 2015 General Election. For the time being therefore, the UK wide income tax rates continue to apply to Scottish taxpayers but the situation could look quite different in the coming years.
For further advice on your tax situation, including help with completing your annual tax return, please contact us on the details below.