New Scottish Income Tax Powers from 17/18 onwards Software Developers Update - 22 December 2016 Following the Scottish Government Budget Announcement HMRC Technical Specifications will be revised to accommodate the wider income tax Powers the Scottish Parliament will exercise from April 2017.

New Scottish Income Tax Powers from 2017/18 The Scottish Parliament already have the ability to vary income tax rates for Scottish taxpayers, they exercised this power for the first time in February this year, choosing to keep tax rates the same as those elsewhere in the UK. From 6th April 2017 the Scottish Parliament will have further powers which provides them with full freedom to set the income tax rates and thresholds for Scottish taxpayers. This will allow the Scottish Parliament to set whatever tax thresholds and percentage rates it wishes, (including a zero rate band). A Scottish basic rate however has to be set. As now, HMRC will administer Scottish Income Tax Powers as part of the UK Income tax system, through PAYE and SA and the new powers only apply to earned income, income from pensions, other non-savings and non-dividend sources. HMRC are implementing changes to their IT systems in readiness for 6 April 2017. If you require any further detailed information regarding these changes please contact HMRC SDST. 1

New Scottish Income Tax Powers from 2017/18 The Proposed Changes The Scottish Government announced its draft Budget on 15 December 2016 proposing the rates and thresholds shown below for the 2017/18 tax year: Please note - these are the proposed rates and thresholds and are yet to be agreed by the Scottish Parliament.   2

New Scottish Income Tax Powers from 2017/18 Reminders A Scottish taxpayer will have a tax code prefixed by S Adjustments and allowances will affect the numeric value in a tax code Allowances and adjustments in relation to earned income, income from pensions and other non-savings income will be subject to tax at Scottish rates and thresholds Personal Saving allowance will be calculated using the rUK rates. Your products will still require validation through RTI Internet and EDI channels 3

New Scottish Income Tax Powers from 2017/18 Requirements to support RTI via EDI and Internet using Third Party Software Key Validation Changes Taxpayers with more than one source of PAYE income, could have a tax code of D0 (Higher Rate) or D1 (Additional Higher Rate). If a taxpayer with a single source of PAYE income has asked for their personal tax free allowance to be reserved for use against other SA income they will have a tax code of BR (Basic Rate) To identify Scottish customers an S will be added as a prefix. These tax codes ensure tax is deducted on all income at the respective rate for the code Taking into account the rUK rates and the changes proposed by the Scottish Budget tax codes would appear as below:

New Scottish Income Tax Powers from 2017/18 Requirements to support RTI via EDI and Internet using Third Party Software Whilst the Scottish Government's proposals for 17/18 do not contain new tax bands HMRC will nonetheless future proof our IT systems before the start of the 2017/18 tax year by increasing the range of valid “SD” tax codes from SD0/SD1 up to SD8 shown below: rUK BR D0 D1   Scottish SBR SD0 SD1 SD2 SD3 SD4 SD5 SD6 SD7 SD8 If the Scottish Parliament approves the announcement made on 15 December and no changes are necessary, it means that tax codes SD2 to SD8 will not be used although they will be shown as valid in the technical specifications. The Scottish Parliament may choose not to follow the Scottish Government’s proposals and vote for something else so the functionality within your products has to be in place to cater for this if needed. Any incoming submissions received using SD2 to SD8 would not be rejected but HMRC would instigate action to ensure the correct tax code is applied.

New Scottish Income Tax Powers from 2017/18 Requirements to support RTI via EDI and Internet using Third Party Software This change will be made for incoming and outgoing submissions and will affect the following services:- MIGs and test services for RTI submissions made via EDI RIM Artefacts and test services for RTI submissions made via the Internet Schemas for P6 and P9 coding notices issued via DPS Revised technical specifications for these services will be issued as soon as possible.

New Scottish Income Tax Powers from 2017/18 Requirements to support RTI via EDI and Internet using Third Party Software The Scottish Government’s proposals for rates and thresholds will be announced annually in their budget and will always be subject to approval by the Scottish Parliament before the start of the tax year. Once set by the Scottish Parliament the income tax rates and thresholds cannot be altered until the following tax year, there will be no mid year changes. If you have any questions around anything contained in this communication please contact The Software Developers Support Team SDSTeam@hmrc.gsi.gov.uk.