Scotland is to introduce a 21 per cent income tax rate for anyone earning over £24,000, with those below that level paying a ‘starter rate’ of 19 per cent, raising significant questions for the pension saving strategy of hundreds of thousands of Scots.
Finance secretary Derek Mackay unveiled the increase in today’s Scottish Budget speech, said higher rate taxpayers would now pay 41 per cent and not 40 per cent, with the top rate increasing from 45 to 46 per cent.
The issue is set to hit the 770,000 taxpayers in Scotland who contribute to pension schemes under a relief at source. The change will mean slightly different calculations for pension contributions in terms of tax relief entitlement and annual allowance availability, meaning some could face tax charges while extra administrative steps will be required for others to be able to claim relief.
Where pension members made contributions in the 2016/17 tax year, HMRC will notify pension providers in January if those members are on an “S” tax code – Scottish taxpayer – or an “rUK” tax code, for those in the rest of the UK. Providers will then be able to claim basic rate tax relief on contributions and pay tax on income at the appropriate rates from the 2018/19 tax year.
For members who didn’t contribute in 2016/17 or join their scheme after that tax year ended, there will be an online HMRC look-up service that providers can use to obtain the correct tax code. However this currently only allows providers to check the code of one member at a time. The lack of a bulk download provision will make it impractical for providers to use the look-up service in all cases say experts.
In the absence of an “S” tax code, a provider must use the “rUK” code. AJ Bell head of technical resources Gareth James argues there is a real possibility that some Scottish taxpayers will end up being treated as UK taxpayers. This could result in them receiving the wrong amount of pension tax relief and potentially exceeding the annual allowance.
James says: “A Scottish basic rate of income tax that is anything other than 20 per cent will result in a potentially large number of people automatically receiving too little or too much pension tax relief on their contributions. This could result in them facing tax charges or having to jump through additional administration hoops to deal with the consequences. It will be confusing for consumers and create additional work for financial advisers and pension providers.”