Devolved tax rate changes mean employers may wish to recraft reward for their Scottish taxpayers

Devolution of Parliamentary powers within the UK means employers need to be increasingly alert to differing taxpayer obligations that lie within their workforce demographic.  

There has been a gradual divergence of the income tax position for Scottish taxpayers and that delta is about to grow wider based on the announcements in the Scottish Budget on 19 December 2023.

A Scottish taxpayer is an individual who is UK-resident for tax purposes and satisfies one of three conditions for the tax year. These are:

• the ‘close connection’ condition
  • through either a single place of residence in Scotland; or
  • where they have more than one residence, having their main place of residence in Scotland for at least as much of the tax year as they reside in any other part of the UK;
• the ‘day count’ condition; and
• the ‘Scottish parliamentarian’ condition.

Place of residence is clearly therefore key to establishing whether an individual is a Scottish taxpayer. Where an individual does not have a residence (or main residence) in Scotland they may still be a Scottish taxpayer if they spend more days in Scotland than in any other part of the UK whilst they are a UK resident.

Scottish taxpayers who are higher earners to pay more income tax in 2024/2025

A new 45% income tax band will be introduced for Scottish taxpayers earning between £75,000 and £125,140.

The top rate of tax, paid by those earning more than £125,000, will rise from 47% to 48%.

The changes mean Scotland will have six income tax bands while the rest of the UK has three, with higher earners in Scotland paying more than other parts of the UK.

The finance secretary in Scotland also confirmed the current thresholds for the higher and top bands - £43,663 and £125,140 respectively - would be frozen instead of rising with inflation.

What are the new income tax bands for Scottish taxpayers?

*Assumes individuals are in receipt of the standard Personal Allowance.

**Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

What do the new income tax bands mean for employers with executives and employees working in Scotland?

Employers are likely to come under pressure from their employees working in Scotland to revisit the employee reward package for 2024/2025, to assess the variable aspects that might be tweaked to optimise outcomes. Measures that might come under scrutiny are:

• for qualifying employee-owned business, the use of tax-free profit share;
• participation in tax-advantaged discretionary or all-employee shares plans;
• the use of growth shares or other restricted share awards where a business is not eligible for, or has exhausted, use of statutory employment-related share plans - although in some cases this might introduce tension between achieving tax savings for participants and the consequential loss of corporation tax relief for the employer in comparison to a non-tax-advantaged option award;
• salary sacrifice arrangements that link to pension contributions; or
• agile working or relocation so that more days are spent in other parts of the UK.

Time will tell what the impact will be for the Scottish housing and labour markets but higher earners who are key performers in an organisation are generally better positioned to relocate their talent and negotiate pay reviews.

In a corporate transactions context, management team members who are Scottish taxpayers are going to be even more motivated to ensure that their reward is structured to be treated as capital gain and not income earnings where the deal is closing after the current tax year.

Reward, tax and HR professionals grappling with how to engage the impacted demographic in their workforce next year may now find that their January to do list has grown longer.

Get in touch

For further information, contact Liz Hunter, Partner in Incentives.