Income Tax

There is an interesting anomaly that can affect taxpayers with homes in Scotland and other parts of the UK. Where this is the case, the question arises as to whether or not the taxpayer is liable to pay Income Tax in Scotland or elsewhere.

As a general rule, the Scottish rate of Income Tax (SRIT) is payable on the non-savings and non-dividend income of those defined as Scottish taxpayers. The definition of a Scottish taxpayer is generally focused on the question of whether the taxpayer has a 'close connection' with Scotland or elsewhere in the UK. The liability to SRIT is not based on nationalist identity, location of work or the source of a person’s income e.g., receiving a salary from a Scottish business.

Where a taxpayer has a home in Scotland and also elsewhere in the UK, they need to ascertain which is their main home based on published guidance and the facts on the ground.

HMRC’s guidance on the issue states the following:

• Your main home is usually where you live and spend most of your time.
• It does not matter whether you own it, rent it or live in it for free.
• Your main home may be the home where you spend less time if that’s where:
  • most of your possessions are;
  • your family lives if you’re married or in a civil partnership;
  • you are registered for matters like your bank account, GP or car insurance; and
  • you are a member of clubs or societies.

It is also possible to change which home counts as your main home if there has been a material change in the underlying facts. Scottish taxpayer status applies for a whole tax year. It is not possible to be a Scottish taxpayer for part of a tax year.

There is a plausible link between a rise in tax payments if tax rates increase or if tax allowances and reliefs fall. But what happens if there is no change in tax rates or allowances?

In this case, there would be an assumption that taxes would not increase; why would they if rates and allowances remain stable?

However, whilst tax rates and allowances may not increase, your earnings may increase and create a larger tax bill.

Unfortunately, many of the tax rates and reliefs are frozen, remaining at the same level for a number of years. For example, the Income Tax personal allowance and the higher-rate threshold – at which point taxpayers will pay 40% Income Tax on income over this limit – will remain at the 2021-22 levels until 2025-26.

Inflation adds its own spike to this process. With inflation running at the present 10% rate, the value of your Income Tax personal allowance – presently £12,570 – would drop to just over £8,000 in real terms after 4 years. If you have managed to secure pay increases to maintain the value of your earnings, your income subject to tax will increase. In some circumstances this may push your earnings into the 40% Income Tax bracket.

This is unfortunate and means that your efforts to maintain your earnings in real terms will be reduced by increased tax and possibly NIC deductions.

Let’s hope that the Treasury will relieve its tax by stealth choke-hold on tax allowances in the next budget, and inflation proof taxes such that additional earnings to cover inflation will not be taxed unduly.  

The Scottish rate of Income Tax (SRIT) is payable on the non-savings and non-dividend income of those defined as Scottish taxpayers.

The definition of a Scottish taxpayer depends on whether the taxpayer has a 'close connection' with Scotland or elsewhere in the UK. The liability to SRIT is not based on nationalist identity, location of work or the source of a person’s income e.g., receiving a salary from a Scottish business.

HMRC’s guidance states that for the vast majority of individuals, the question of whether or not they are a Scottish taxpayer will be a simple one – they will either live in Scotland and thus be a Scottish taxpayer or live elsewhere in the UK and not be a Scottish taxpayer. 

If a taxpayer moves to or from Scotland from elsewhere in the UK, then their tax liability for the tax year in question will be based on where they spent the most time in the relevant tax year. Scottish taxpayer status applies for a whole tax year. It is not possible to be a Scottish taxpayer for part of a tax year.

You may also pay Scottish Income Tax if you live in a home in Scotland and also have a home elsewhere in the UK. In this case, you need to identify which is your main home based on published guidance and the facts on the ground. You may also be liable to SRIT if you do not have a home and stay in Scotland regularly, for example you stay offshore or in hotels.

The Scottish rates and bands for 2023-24 are as follows:

The rent-a-room scheme is a set of special rules designed to help homeowners who rent-a-room in their home. If you are using this scheme, you should ensure that rents received from lodgers during the current tax year do no exceed £7,500. The tax exemption is automatic if you earn less than £7,500 and there are no specific tax reporting requirements. If required, homeowners can opt out of the scheme and record property income and expenses as usual.

The relief only applies to the letting of furnished accommodation and is used when a bedroom is rented out to a lodger by homeowners in their home. The relief also simplifies the tax and administrative burden for those with rent-a-room income up to £7,500. The limit is reduced by half if the income from letting accommodation in the same property is shared by a joint owner of the property.

The rent-a-room limit includes any amounts received for meals, goods and services provided, such as cleaning or laundry. If gross receipts are more than the limit taxpayers can choose between paying tax on the actual profit (gross rents minus actual expenses and capital allowances) or the gross receipts (and any balancing charges) minus the allowance – with no deduction for expenses or capital allowances.

The Personal Savings Allowance (PSA) was launched in April 2016. For basic-rate taxpayers the first £1,000 of interest on savings income is tax-free. For higher-rate taxpayers the tax-free personal savings allowance is £500. Anyone earning over £125,140, in the current 2023-24 tax year, does not benefit from the PSA.

Interest from savings products such as ISA's and premium bond wins do not count towards the limit. So, a basic-rate taxpayer with ISA interest and premium bond wins can still benefit in full from the relevant PSA limits.

Savings income covered under the PSA includes account interest earned from bank and building society accounts as well as accounts with other providers such as savings and credit unions.

It also includes interest from:

• unit trusts, investment trusts and open-ended investment companies
• peer-to-peer lending
• trust funds
• payment protection insurance (PPI)
• government or company bonds
• life annuity payments
• some life insurance contracts.

Taxpayers who still need to pay tax on savings income need to pay tax on any interest over their allowance at their usual rate of Income Tax.

Students that work may need to pay Income Tax and National Insurance. Employers are required to calculate the amount of tax they need to pay on the basis that the students would be working for the rest of the tax year.

This means that an overpayment of Income Tax can occur when a student or temporary worker earns more than their monthly tax-free allowance of £1,042, but over the course of the tax year earn less than their annual allowance. For example, a student only working over the summer period and earning more than £1,042 a month is unlikely to have exceeded the current £12,570 tax free personal allowance.

Students (and other temporary workers) are not required to pay Income Tax if their earnings are below the tax-free personal allowance, currently £12,570.

A refund of overpaid tax can be requested using an online version of the P50 form entitled Claim for repayment of tax. The P50 form can only be used if you are not going to work for at least the next 4 weeks and are not claiming certain state benefits.

Any students that are continuing to work for the rest of the tax year in part-time jobs should consider waiting until the end of the tax year to make a claim.

A reminder that there are two separate annual £1,000 tax allowances for property and trading income. If you have both types of income highlighted below, then you can claim a £1,000 allowance for each.

The £1,000 exemptions from tax apply in the following circumstances:

• If you make up to £1,000 from self-employment, casual services (such as babysitting or gardening) or hiring personal equipment (such as power tools). This is known as the trading allowance.
• If your annual gross property income is £1,000 or less, from one or more property businesses, you will not have to tell HMRC or declare this income on a tax return. For example, from renting a driveway or power tools. This is known as the property allowance.

Where each respective allowance covers all the individual’s relevant income (before expenses) the income is tax-free and does not have to be declared. Taxpayers with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. 

You cannot use the allowances in a tax year, if you have any trade or property income from:

• a company you or someone connected to you owns or controls;
• a partnership where you or someone connected to you are partners; and
• your employer or the employer of your spouse or civil partner.

You cannot use the property allowance if you:

• claim the tax reducer for finance costs such as mortgage interest for a residential property; and
• deduct expenses from income from letting a room in your own home instead of using the rent-a-room scheme.

If you earn over £100,000 in any tax year your personal allowance is gradually reduced by £1 for every £2 of adjusted net income over £100,000 irrespective of age. This means that any taxable receipt that boosts your income over £100,000 will result in a reduction in personal tax allowances. Accordingly, your personal Income Tax allowance would be reduced to zero if your adjusted net income is £125,140 or above.

Your adjusted net income is your total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions.

For the current tax year if your adjusted net income is likely to fall between £100,000 and £125,140 you would pay an effective marginal rate of tax of 60%.

If your income sits within this band you should consider what financial planning opportunities are available in order to avoid this personal allowance trap by reducing your income below £100,000. For example, by giving gifts to charity, increasing pension contributions and participating in certain investment schemes.

A higher rate or additional rate taxpayer who wanted to reduce their tax bill could make a gift to charity in the current tax year and then elect to carry back the contribution to 2022-23. A request to carry back the donation must be made before or at the same time as the 2022-23 Self-Assessment return is completed and filed, i.e., by 31 January 2024.

The Gift Aid scheme is available to all UK taxpayers. The charity or Community Amateur Sports Clubs (CASC) concerned can take a taxpayer’s donation and, provided all the qualifying conditions are met, can reclaim the basic rate tax allowing for an extra 25p of tax relief on every pound donated to charity.

Higher rate and additional rate taxpayers are eligible to claim tax relief on the difference between the basic rate and their highest rate of tax. This can be actioned through their Self-Assessment tax return or by asking HMRC to amend their tax code.

For example:

If a taxpayer donates £500 to charity, the total value of the donation to the charity is £625. The taxpayer can claim additional tax back of:

• £125 if they pay tax at 40% (£625 × 20%),
• £156.25 if they pay tax at 45% (£625 × 20%) plus (£625 × 5%).

Taxpayers should be aware that one of the conditions of qualifying for tax relief is that you must have paid enough tax (or any tax) in the relevant tax year. The rules state that your donations will qualify for tax relief as long as you have not claimed more than 4 times what you have paid in tax in that tax year. If you have claimed more tax relief than you are entitled to you will need to notify the charity and pay back any excess tax relief to HMRC.

Taxpayers can also give money to a charity from their wages using the payroll giving scheme. The scheme allows taxpayers to make a tax-free donation to charity directly from their pay or pension if their employer runs a suitable scheme, which has been approved by HMRC. 

There are a number of reasons why you might need to complete a Self-Assessment return. This includes if you are self-employed, a company director, have an annual income over £100,000 and / or have income from savings, investment or property.

Taxpayers that need to complete a Self-Assessment return for the first time should inform HMRC as soon as possible. The latest date that HMRC should be notified is by 5 October following the end of the tax year for which a Self-Assessment return needs to be filed.

HMRC has an online tool www.gov.uk/check-if-you-need-tax-return/ that can help you check if you are required to submit a Self-Assessment return.

The list of taxpayers that are usually required to submit a Self-Assessment return includes:

• The self-employed (earning more than £1,000);
• Taxpayers who had £2,500 or more in untaxed income;
• Those with savings or investment income of £10,000 or more before tax;
• Taxpayers who made profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax;
• Company directors – unless it was for a non-profit organisation (such as a charity) and you didn’t get any pay or benefits, like a company car;
• Taxpayers whose income (or that of their partner’s) was over £50,000 and one of you claimed Child Benefit;
• Taxpayers who had income from abroad that they needed to pay tax on;
• Taxpayers who lived abroad and had a UK income; or
• Income over £100,000.