Landing a bigger income tax liability because your residence is in Scotland

The Scottish rate of income tax has applied to the non-dividend and non-savings income of Scottish taxpayers since 6 April 2016 and is administered by HMRC on behalf of the Scottish government. The definition of Scottish taxpayer is based on the residence of the individual rather than, for example, the location of their employer’s workplace.

An individual may be determined to be a Scottish taxpayer:

• if they have a single place of residence which is in Scotland; or
• if they have more than one place of residence and the place regarded as the dwelling in which they habitually live is in Scotland; or
• if it is not possible to identify the individual’s main place of residence, where more days in the tax year are spent in Scotland than any other UK country.

For practical purposes, this concept of ‘place of residence’ is relevant only to determining Scottish taxpayer status. It does not apply for the purpose of applying the concept of residence as used in other aspects of tax law.

Scottish taxpayer status applies to the whole of a tax year and can therefore only be determined with certainty after the end of each tax year.

With the Scottish government being able to determine Scottish income tax rates and thresholds, we have seen a widening of the gap between the income tax paid by taxpayers who are resident in Scotland and those with the same level of income in the rest of the UK. This gap has grown further following the announcement in the recent Scottish Budget that, from 6 April 2023, the Scottish top rate of tax will be increased from 46% to 47% for those earning £125,140 and above, and the Scottish higher rate of tax will be increased from 41% to 42%. The additional rate of income tax elsewhere in the UK will remain at 45% (on earnings of £125,140 and above) and the higher rate will remain at 40%. Another factor which widens the gap is that in Scotland, the higher rate tax threshold is set at £43,662, whilst in the rest of the UK, it is £50,270.

To provide an illustrative example, from 6 April 2023, a Scottish rate taxpayer on an annual salary of £50,000 (with no other income) will pay approximately £1,550 more in income tax each year than an individual on the same salary who lives elsewhere in the UK.

For individuals on an annual salary of £200,000, the Scottish rate taxpayer will pay approximately £4,855 more in income tax.

The application of the rules in relation to what constitutes an individual’s main place of residence to determine if they are a Scottish taxpayer can be complex. Take, for example, an individual who has a home in Edinburgh but gets a job in Leeds with a salary in excess of £50,000 a year. They don’t relocate, so still have their family home in Edinburgh, but rent a property in Leeds. If they gave their employer details of the Leeds address, which is then provided to HMRC, the Scottish ‘S’ will be removed from their tax code and less income tax will be deducted through the PAYE system. Consequently, they will not pay the correct income tax as, in accordance with HMRC guidance their main place of residence in this scenario would remain in Edinburgh. HMRC guidance states that a main place of residence is not necessarily the residence where the individual spends the majority of their time but is that with which the individual is seen to have the greatest degree of connection.

It is recognised that some employers are not fully aware of the main place of residence rules in such scenarios and may inadvertently provide HMRC with the wrong information, which would ultimately result in an underpayment, or in some cases, an overpayment of income tax. Any subsequent HMRC enquiry will pick up on the incorrect tax code and in turn, an underpayment or overpayment of tax, but this is clearly an issue that may be challenging for HMRC to identify and resolve.