Devolved Budgets: implications for employers

The devolved Budgets for 2024/25 were presented to the Scottish and Welsh Parliaments on 19 December 2023. On income tax, the Scottish Government plans to introduce a new 45 percent rate on Scottish taxpayers’ relevant taxable income (including employment income) between £75,000 – £125,140, and to increase the top rate of income tax to 48 percent. The Welsh Government does not currently propose any changes to the tax rates that apply to relevant income of Welsh taxpayers, who should therefore continue to be taxed on employment income on the same basis as employees in England and Northern Ireland. This article summarises key employment tax compliance considerations that these announcements raise for organisations with employees based in Scotland and/or Wales.

Income tax is partially devolved, with certain powers exercised by the Scottish and Welsh Parliaments in relation to Scottish and Welsh taxpayers (broadly, UK resident individuals who have a close connection with either Scotland or Wales), and all other powers exercised by the UK Parliament in relation to all UK resident individuals.

Both Scottish and Welsh taxpayers are entitled to an income tax free personal allowance set by the UK Parliament (subject to their personal circumstances), and are subject to tax on savings income (i.e. interest) and dividends based on the same bands and rates as other individual UK taxpayers.

However, Scottish and Welsh taxpayers are subject to income tax on non-savings and non-dividend income (e.g. employment income) based on rates – and for Scottish taxpayers bands – set by the relevant devolved parliament. 

The Starter (19 percent) and Basic (20 percent) rates of income tax on relevant income will remain unchanged, but the bands of income to which the Starter and Basic rates apply will each increase by inflation from 6 April 2024.

The Higher (42 percent) rate of income tax on relevant income will also remain unchanged, as will the threshold from which the Higher rate is payable, but a new Advanced (45 percent) rate of income tax will apply to relevant income above £75,000 up to the Top rate threshold.

The Top rate of income tax will continue to apply to relevant income above £125,150 but will increase from 47 percent to 48 percent from 6 April 2024. 

*Assumes individuals are in receipt of the Standard UK Personal Allowance of £12,570.

**The Personal Allowance reduces by £1 for every £2 of taxable income above £100,000.

Though a minority administration, the Scottish Government’s shared policy programme with the Scottish Green Party means that the Budget is likely to pass in its current form.

Welsh taxpayers are subject to income tax on relevant income based on the basic, higher, and additional rate bands set by the UK Parliament.

However, the Welsh basic, higher, and additional rates of income tax are set by deducting 10 percentage points from each of the main rates, and then adding the ‘top up’ rates set by the Welsh Parliament. The Welsh Government proposes to retain these at 10 percent, meaning that the Welsh rates of income tax will continue to be the same as the main rates of UK income tax.

Employers should think through what impact the devolved Budgets’ income tax announcements could have for their employment tax compliance for 2024/25, including:

• How processes for identifying Scottish and Welsh taxpayers in the workforce could be demonstrated to HMRC to be appropriate and robust;
• How the prospective Scottish rate changes could affect the cost of any PAYE Settlement Agreement (PSA) (and when any additional costs should be accrued);
• How the prospective Scottish rate changes could affect the cost of tax equalisation policies for expatriate employees; and
• What payroll system changes and updates will be required to operate the proposed Scottish rate changes and what testing will be undertaken prior to the first pay run of 2024/25.

Employers should also consider whether the prospective Scottish rate increases will mean that any proposed pay increases or new benefits will fully meet their commercial objectives if they inadvertently push employees who are Scottish taxpayers into a higher marginal tax rate.

Employers who enter into a PSA with HMRC must perform separate calculations for Scottish and Welsh taxpayers. HMRC have confirmed that, for these purposes, it is appropriate to identify Scottish and Welsh taxpayers based on their PAYE code.

In effect, responsibility for notifying the employer of an individual employee’s status as a Scottish taxpayer (with a an ‘S’ prefix to their PAYE code) or a Welsh taxpayer (with a ‘C’ prefix) for these purposes therefore lies with the employee and HMRC. Employers must still ensure they have a system in place to review their employees’ PAYE codes at the end of the relevant tax year (as Scottish or Welsh taxpayer status applies for the whole year) when preparing their PSA calculations, and consider what employee communications might be appropriate to ensure employees understand their obligations to assess and inform HMRC of their Scottish or Welsh taxpayer status.

However, where an employer operates an Appendix 6 modified payroll agreement in respect of tax equalised expatriates, HMRC will not issue PAYE codes for covered employees. In these circumstances, the employer must have appropriate systems and processes in place to ensure they can correctly identify Scottish and Welsh taxpayers based on the applicable statutory tests, relevant facts, and HMRC’s published guidance on Scottish and Welsh taxpayer status.

Please contact the authors or your usual KPMG in the UK contact to talk through what the Scottish and Welsh Budgets might mean for your workforce.

For further information please contact:

• Catriona Donald
• Sarah Haynes