WHAT are the implications of the Smith recommendations to devolve income tax?
Each Scottish taxpayer's take-home pay may differ in the future from people south of the Border, depending on the extent to which the Scottish Parliament decides to exercise its devolved powers.
Any business with employees in both Scotland and the rest of the UK will have new 'S' payroll codes for Scottish taxpayers. This may create associated costs.
It is important to define what 'devolved income tax' actually means. The options on the table for the Smith Commission to devolve included any of the following areas of responsibility
l rates (e.g. 20 per cent, 40 per cent, etc)
l bands (£0 to £31,865; £31,866 to £150,000)
l personal allowances (£10,000)
l whether or not to include just earned income (e.g. salary) or earned income and investment income (savings and dividends).
l the entire responsibility for income tax, including the tax base - what the tax is levied on - could have been devolved.
Lord Smith decided to devolve only rates and bands. To restrict devolution to income tax rates and the bands is a practical compromise which enables the tax base to have a consistent UK measure, extends the new Scottish Rate of Income Tax (SRIT) that is already planned from April, 2016, and means HMRC can continue to administer the management and collection of the tax through PAYE codes.
Other consequences will be the need to identify a Scottish taxpayer - who are they and who is responsible for their identification? In broad terms, a Scottish taxpayer is someone with their main residence in Scotland.
Why did Smith focus on income tax and not one of the other taxes, such as corporation tax? Income tax is by far the biggest generator of tax and is relatively predictable compared to other taxes.
In summary, the new proposals mean there will be Scottish rates and bands set by the Scottish Parliament but the existing machinery of PAYE can be used without significant further cost.
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