Given the significant differences in income tax rates between Scotland and the rest of the UK, does Covid-19 cause any issues for payroll teams from an internal UK payroll / PAYE withholding perspective?
In the first instance, most payroll teams will say ‘no’. After all, payroll teams simply operate the PAYE tax code which is provided by HM Revenue & Customs. As such, they will simply apply Scottish tax rates if they receive a Scottish PAYE tax code or the rest of the UK tax rates for the other tax codes.
However, whilst this straightforward approach is valid under normal circumstances, Covid-19 and the associated homeworking that has resulted are not ‘normal times’. Many people are working on a totally different basis at the present time and have been for five to six months already – and will quite possibly continue to work from home offices for the foreseeable future. This can mean, for example, that people who were historically working and living in Scotland on a full-time basis have now been working from home in England (or another part of the UK). Alternatively, people who have been historically working in the rest of the UK, may now have moved to Scotland. In our experience, this is particularly true with younger employees – e.g. relatively new graduates – who may have moved back to their parents’ home during the Covid-19 pandemic rather than continuing to rent an expensive flat, for example, near their official place of work.
What is the difference between Scottish and the rest of the UK income tax rates?
Whilst for many years there was no difference in the tax rates which applied in Scotland and the rest of the UK, over the past 10 years this historical position has changed and one can find significant differences in income tax liabilities between the two. In simple terms, lower earners in Scotland pay slightly less tax than their counterparts in other parts of the UK, whilst medium-to-high earners can pay considerably more tax if they’re Scottish resident.
The below table shows you the different tax liabilities which could arise in Scotland and the rest of the UK for selected salary levels:
| £20,000 per annum | £50,000 per annum | £80,000 per annum | |
| Scotland | £1,478 PAYE due | £9,040 PAYE due | £21,340 PAYE due |
| Rest of UK | £1,498 PAYE due | £7,488 PAYE due | £19,498 PAYE due |
Do you therefore really want people to suddenly realise that they may need to pay £1500 (or more) in additional taxes in six or 12 months’ time, when the 2020/21 tax year has finished? After all, they probably won’t have the money readily available in many cases and would quite possibly (though unfairly) blame the payroll team for the problem.
So, what should the payroll team do?
We would recommend that to try and ensure they’re operating everything correctly, payroll teams consider:
- reviewing the HR address records for their employees and
- comparing these to the PAYE codes that they hold for their individuals.
If the records show a ‘disconnect’ – i.e. a Scottish address and no Scottish PAYE code or a Scottish PAYE code and a rest of the UK address, the team can then look at investigating those cases in more depth. This could involve, for example, sending out an explanatory email to people in this class and asking them to confirm what their position is – that is, whether they are Scottish or rest of the UK resident for tax purposes.
We would not suggest that payroll teams have detailed discussions with employees about their resident position as that is not the job of payroll and the rules as to whether someone is resident in Scotland or the rest of the UK are complex, particularly, where they have moved during the year or have ‘two homes’ available to them. Payroll teams could, however, signpost affected employees to HMRC guidance in this area using the following link:
https://www.gov.uk/guidance/work-out-if-youll-pay-the-scottish-rate-of-income-tax
In Summary
Whilst payroll teams are busy with their day-to-day work, and considering the issue of whether somebody is resident in Scotland or the rest of the UK may be considered ‘unnecessary’, by looking to understand the official tax resident status of their UK-based employees, payroll teams can help ensure that employees avoid any ‘nasty surprises’ at the end of the tax year and really ensure that they ‘add value’ to their companies.
Indeed, the uncertainties created by the lockdown and economic disruption arguably make it more important than ever for payroll teams to genuinely provide as much support as possible, both to individual employees and companies, whilst people and businesses struggle with an unfamiliar environment and the related uncertainty that this has brought.