Application of K codes in Scotland

chaliapin

Hello all, I'm keen to pick your brains on the application of K codes in Scotland.  I'm happy with the basic reason for and application of K codes, that is to collect earlier unpaid tax or to tax otherwise untaxed current income (eg state pension) by exhausting the personal allowance and taxing the additional taxable income at source etc.  What I can't get my head around is the relationship between the Scottish tax on earned income and the UK tax on unearned income.

My wife's position next year, using round but broadly accurate figures, will look like this.

Work pension - £31,000

State pension - £10,000

Bank interest - £4,000

Interest on family loan - £3,000

Total taxable income £48,000

If we lived in England, the sum would be simple enough.  The personal allowance of £12,570 would be exhausted by the untaxed £17,000 (10k+4k+3k) and the negative £4,430 balance would be turned into a K code of K443.  She'd receive her work pension of £31,000 to which the notional extra income of £4,430 would be added, meaning she'd be taxed on £35,430 over the year.  This would all fall within the basic rate tax range of £37,700 and I imagine the end of year washup/identification of next year's tax code would be when she would get the benefit of the £1,000 personal savings allowance (PSA).

We live in Scotland, however, where higher rate tax of 42% kicks in at £43,663.  With the same personal allowance of £12,570, that means the starter, basic and intermediate rates of tax provide a range of £31,093.  If the K443 code is applied, therefore, my wife will pay higher rate tax during the year, when it's not actually due.  While her earned income is taxed at Scottish rates, she won't have earned enough (£50,270) to pay (UK) higher rate tax on her unearned income, ie interest.  

So that's the conundrum.  How do K codes in Scotland take account of the fact that earned income is taxed at Scottish rates but unearned income is taxed at UK rates?  Is she just going to be taxed at a higher rate during the year but have it reversed out via her tax code during the following year?

I've made some assumptions here, not the least of which is that K codes pick up unearned income; if they don't, things become a little simpler.

As always, v grateful for any thoughts or advice or useful pointing at suitable online worked exampes etc.

Thanks as ever.  Chaliapin.

jem16

An interesting question as I am in the same situation. I do, however, still submit a tax return so i expect it to sort itself out there.

I'm waiting on a Tax certificate and then I can do my tax return for 2022/23 so perhaps all may be a little clearer at that point once i see the calculation.

chaliapin

Thanks, jem16.  I’m happy with the calculation itself; it’s the in-year application of the K code that’s defeating me.  Sorry if I didn’t make that clear.  

I can work out the tax due; what I can’t do is see how HMRC can apply the mathematically correct K code without effectively but wrongly treating my wife as an HR taxpayer.

Dazed_and_C0nfused

The simple answer is that the tax code deductions would be tweaked to reflect the tax rates an employer or pension payer operating a Scottish tax code has to use.

For example if the tax due on interest was £1,000 and the Scottish taxpayer was paying plenty of higher rate tax then the tax code adjustment would be £2,380.

For a Welsh or rest of the UK taxpayer the tax code adjustment would be £2,500.

It gets more complicated to follow when the adjustment involves tax paid at more than one rate.

A similar process is followed for Marriage Allowance (for Scottish taxpayer's).

https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye100035

chaliapin

Thanks for that; tweaking the code looks like the ideal answer.  I couldn’t find it online and am grateful for the link.