Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Scottish income tax overhaul – how will it affect your pension?
If you’re a Scottish taxpayer, big changes are just around the corner. From April this year some people north of the border will pay a different rate of income tax to their counterparts in the rest of the UK.
It is the first time the Scottish Government has used powers that allow it to set additional income tax rates from the rest of the UK. Two new tax bands (‘starter rate’ and ‘intermediate rate’) will be established, while the higher and additional income tax rates will also be increased (see table for details).
The move will have a knock-on impact on pension savers in Scotland who currently receive pension tax relief at their marginal rate. HMRC has now confirmed details of how this will work.
RELIEF AT SOURCE
Members of schemes which apply tax relief after they have paid income tax – known in the jargon as ‘relief at source’ – will be affected in different ways.
Savers will still receive tax relief automatically at the basic rate of 20%, meaning those falling into the starter rate (£11,850 - £13,850) and basic rate (£13,850 - £24,000) bands won’t have to do anything in order to receive the tax relief they are due. HMRC will not recover the difference between the Scottish starter and Scottish basic rate.
However, anyone who falls into the new 21% intermediate band (£24,000 - £43,430) will need to tell HMRC in order to get the extra 1% of tax relief they are entitled to. Many of these people will never have filled out a tax return before and may well question whether it’s worth the hassle.
Someone who earns £30,000 and contributes 10% of their salary would pay in £2,400 over the course of a year, receive tax relief at source of £600 and can then reclaim an extra £30. While this might not sound like a lot, over the course of a lifetime that could add up to thousands of pounds.
Higher and additional-rate taxpayers will continue to apply for their tax relief through self-assessment, as they do at the moment. People in these tax brackets will have an extra reason to save in a pension though as they get an additional 1% in tax relief under the new framework.
Some pension schemes operate pension tax relief on a ‘net pay’ basis. This simply means pension contributions are deducted before income tax is applied to their pay. These arrangements have caused controversy in the rest of the UK because people who pay no income tax do not receive a pension tax relief top-up automatically.
HMRC has confirmed these schemes will continue to operate in the same way for residents north of the border as they do now under the new tax regime.
Tom Selby, senior analyst, AJ Bell