North of England set to become dormitory for wealthy Scots

The north of England may become a Scottish executives’ area of choice to live if the Scottish Parliament sets the Scottish income tax at higher rates than the rest of the UK.

In effect the north of England could become a dormitory for wealthy families, presently living in Scotland, who for tax reasons, will seek to establish residential status in England.

The Scottish Government is considering higher income tax rates than England under its devolved powers and HMRC have recently published guidance on who will be liable to pay the devolved Scottish rate of income tax (SRIT):

“The SRIT, as introduced by the Scotland Act 2012, will be charged on the non-savings and non-dividend income of those defined as Scottish taxpayers and will start from April 2016.

The definition of a Scottish taxpayer is focused on where an individual lives, or resides, in the course of a 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.

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.

Whether or not an individual is a Scottish taxpayer will not, however, be simple in all cases. This draft technical guidance provides initial detail on the manner in which HM Revenue and Customs (HMRC) will interpret some of the terms used in the sections of the Scotland Act 2012, which set out the definition of a Scottish taxpayer.

HMRC is also currently working closely with Ministry of Defence on the preparation of separate guidance to ensure that all service personnel will have clarity on how SRIT will apply to their individual circumstances prior to its introduction. This guidance will be available later this year.”

If SRIT is eventually set at higher rates in Scotland, it will only be payable if you live in Scotland, and not if you work in Scotland. High income earners in Scotland could choose to live in England and commute to work, and thus pay income tax at marginally lower rates.

This will create all sorts of problems as an employer north of the border may have to run two payrolls: one for Scottish residents and one for English residents!

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