The Wales Bill received Royal Assent on 17 December 2014 and became the Wales Act 2014, which introduced the Welsh rates of income tax. The Wales Act 2017 removed the requirement for a referendum before income tax powers for Wales could commence, which will now happen next year.

HMRC has produced a technical note setting out the government’s policy position in areas where the rate-setting power interacts with other areas of the income tax system, and is inviting feedback on the accuracy of the draft legislation that accompanies the technical note.

The technical note states the Welsh rates of income tax will be charged on the non-savings, non-dividend income of those defined as Welsh taxpayers. The rate paid by Welsh taxpayers will be calculated by reducing the basic, higher and additional rates of income tax levied by the UK government by 10 pence in the pound and adding new Welsh rates proposed by the Welsh government and set by the National Assembly for Wales.

The National Assembly for Wales will set three rates: the Welsh basic rate; the Welsh higher rate; and the Welsh additional rate. Together these three rates will be referred to as the Welsh rates. As the Welsh rates of income tax are not a discrete tax they continue to be covered by existing UK double taxation agreements.

Individuals who have more than one place of residence in the UK will be a Welsh taxpayer if their main place of residence is in Wales for longer than in any other part of the UK. Individuals who cannot identify a main place of residence will need to count the days they spend in Wales and elsewhere in the UK - if they spend more days in Wales than in any other constituent part of the UK, they will be a Welsh taxpayer.

As is the case with Scottish devolved taxpayers, gift aid for charities will continue to apply at the UK basic rate, regardless of the tax position of the donor. Donors who are higher and additional rate taxpayers are also able to claim tax relief on their donations and Welsh taxpayers will be able to claim relief equal to the difference between the UK basic and the highest Welsh rate of tax that applies to them.

The technical note also covers a number of other issues, including pensions tax relief, which will be given at an individual’s marginal rate, and the handling of trusts and deceased person’s estates.

Payments to foreign entertainers and sportspersons are currently subject to a withholding tax at the UK basic rate. Since such persons are by definition not resident in the UK for income tax purposes, the UK basic rate will continue to apply wherever the entertainer or sportsperson performs. Long-term UK residents who are not domiciled here can pay an annual charge to be taxed under the remittance basis. This will not be affected by the introduction of the Welsh rates of income tax. Payments of the charge due from Welsh taxpayers will continue to be paid direct to the UK Exchequer.

As regards updates to the PAYE regulations, in addition to detailed consequential changes, the regulations will provide for a new ‘C’ prefix to the standard tax code as an indicator that the Welsh rates of income tax apply.

The government intends to follow the same system of making Welsh taxpayers aware of the amount of Welsh rates of income tax they have paid as for Scottish taxpayers and Scottish income tax. This means the Welsh rates will be shown separately in HMRC’s tax calculator and annual tax summary. 

The consultation closes on 5 November 2018.

Clarifying the scope of the Welsh rates of Income Tax - technical note and draft legislation is here

Report by Pat Sweet