In this blog, we’ll be discussing the tax paid by a Scottish company director. That is a company director who lives in Scotland and is liable to Scottish rates of taxation on their salary.
We’ll also explain what tax you will pay on dividend income received from company shares, in addition to the Corporation Tax rate applicable to a Scottish company.
Taxation in Scotland
By and large, taxation in Scotland is governed by UK law and administered by HMRC, with the exception of local taxes (e.g. council tax, non-domestic/business rates) and certain other devolved taxes, like Land and Buildings Transaction Tax. These are controlled by the Scottish Government and administered by local authorities and Revenue Scotland.
However, the Scottish Parliament has the power to set different Income Tax rates and tax band thresholds in Scotland (excluding the annual Personal Allowance). This determines the amount of Income Tax payable by Scottish taxpayers on their non-savings and non-dividend income.
Income Tax in Scotland is not fully devolved and HMRC continues to collect and manage Scottish Income Tax, which includes identifying Scottish taxpayers, before paying the collected tax to the Scottish Government.
Income tax rates for a Scottish company director
If you live in Scotland, you will pay Scottish Income Tax on your director’s salary (and any other wages you receive), your pension, and most other forms of taxable income – apart from dividends and savings interest.
It doesn’t matter where you’re from or which part of the UK your company is registered in – the Income Tax you pay is determined by where in the UK you live.
This means that, as a resident of Scotland, you will pay Scottish Income Tax regardless of whether your company is registered in England & Wales, Northern Ireland, or Scotland. Your company’s jurisdiction (country) of incorporation is irrelevant.
You will also pay Scottish Income Tax if you:
- Move to/from Scotland and live there for a longer period than elsewhere in the UK during a tax year
- Live in a home in Scotland and one somewhere else in the UK (e.g. for work) but your Scottish residence is your main home
- Cannot identify anywhere as your main home but you spend more days in Scotland than anywhere else in the UK – this could apply if, for example, you travel for work and stay in hotels, or you work offshore
If you move to/from Scotland, you must contact HMRC to provide your new address. You could end up paying the wrong tax Income Tax rates otherwise.
If you have more than one residence and are not sure which one is your main home, HMRC provides detailed guidance on working out if you’ll pay Scottish Income Tax.
Scottish Income Tax rates for the 2022-23 and 2021-22 tax years
|Tax band||Taxable income threshold 2022-23||Taxable income threshold 2021-22||Tax rate|
|Personal Allowance||Up to £12,570||Up to £12,570||0%|
|Starter rate||£12,571 to £14,732||£12,571 to £14,667||19%|
|Basic rate||£14,733 to £25,688||£14,668 to £25,296||20%|
|Intermediate rate||£25,689 to £43,662||£25,297 to £43,662||21%|
|Higher rate||£43,663 to £150,000||£43,663 to £150,000||41%|
|Top rate||Over £150,000||Over £150,000||46%|
The table above shows the rates that you’ll pay in each tax band if you’re eligible for the standard Personal Allowance (PA) of £12,570/year.
Sole traders and members of partnerships (including LLPs) who reside in Scotland also pay Scottish rates of Income Tax through Self Assessment on their taxable earnings/individual profits.
What tax do I pay on shares as a Scottish company shareholder?
Shareholders of UK companies pay the same rates of dividend tax on their dividend income, regardless of where in the UK their companies are registered. The same is true of savings interest.
Therefore, if you live in any part of the UK and own shares in a company that is registered in Scotland, England & Wales, or Northern Ireland, you will pay the following rates of tax on your dividend income:
|Income Tax band||Taxable income threshold||Dividend tax rate 2022-23||Dividend tax rate 2021-22|
|Personal Allowance||Up to £12,570||0%||0%|
|Additional rate||Over £150,000||39.35%||38.1%|
In addition to enjoying lower rates of tax on dividend income, all UK shareholders are entitled to an annual dividend allowance of £2,000. This means that your first £2,000 of dividend income in the tax year will be tax free.
How much National Insurance do I pay in Scotland?
National Insurance contributions (NIC) rates in Scotland are in line with the rest of the UK. Therefore, you pay the same amount of NIC regardless of where in the UK you live.
For the 2022-23 tax year, you will pay the following rates of Class 1 National Insurance on your director’s salary:
- 13.25% on annual earnings between £11,908 and £50,270
- 3.25% on annual earnings above £50,270
If you receive dividends from shares, you will pay the following rates of National Insurance on your dividend income (based on your total annual earnings from all sources):
- Class 2 NIC – £3.15/week if your annual profits are £11,908 or more
- Class 4 NIC – 10.25% on profits between £11,908 and £50,270; then 3.25% on profits above £50,270
Your company will also pay 15.05% employers’ Class 1 NIC on your director’s salary earnings from £9,100/year.
How do I pay tax and NIC on my director’s salary and dividends?
If you pay yourself a director’s salary of at least £123/week, you will need to register your limited company as an employer with HMRC, enrol for Pay As You Earn (PAYE), and process your salary through your company’s payroll.
This means that your salary will be taxed at source. Your Income Tax and Class 1 employee NIC will be deducted and paid to HMRC through PAYE.
Any employers’ Class 1 NIC that your company owes must also be paid through PAYE.
- See also: What is PAYE?
- See also: Is a director an employee of a company?
- See also: Self Assessment for directors explained
The way in which you pay tax on dividends is different. You will need to register for Self Assessment, file an annual tax return to report your dividend income, and pay any dividend tax and National Insurance (Class 2 and Class 4) that you owe on these earnings.
What Corporation Tax does a Scottish company pay?
All UK companies pay the same rate of Corporation Tax, regardless of where in the UK they are registered. Therefore, your Scottish company will pay 19% Corporation Tax on its taxable profits – just like companies in England & Wales and Northern Ireland.
Tax is never the most riveting of topics, but we hope that this post has clarified how much Income Tax, National Insurance, and dividend tax you will pay as a Scottish company director and shareholder.
If you have any questions about limited company tax – or anything else related to setting up and running a UK company – please contact our company formation team on 020 7871 9990 or leave a comment below.