Scottish pension savers face tax headache

Scottish pension savers will have to contact HMRC to get full tax relief if they are in relief-at-source schemes and qualify as 21 per cent taxpayers, the Revenue has confirmed .

People earning between £24,000 and £43,430 will have to contact HMRC directly if they want to get their extra 1 per cent tax relief following the change, which follows the creation of two new tax bands for income tax.

HMRC says it will ‘continue to explore the most appropriate way to cater for the new income tax rates and bands announced by the Scottish Government, as well as future changes by the devolved administrations’.

The Scottish Government announced the creation of two new tax bands – ‘starter rate’ and ‘intermediate rate’ – in December last year, and is increasing the higher and additional income tax rates to 41 and 46 per cent from April this year. It is the first time the Scottish Government has set different tax rates to the rest of the UK.
Aegon pensions director Steven Cameron says: “In ‘relief at source’ arrangements, the pension provider makes the claim for 20 per cent basic rate tax relief with higher rate taxpayers claiming further relief personally, often through tax returns. HMRC has confirmed providers here will continue to collect relief at the rate of 20 per cent. This means those paying 19% or no tax continue to get relief at the 20 per cent level. However, it’s far from ideal that those in Scotland paying 21 per cent income tax will now have to make a specific claim to get the extra 1 per cent relief. While a fair entitlement, the effort to get £10 extra relief for every £1000 of personal contributions will put people off. Of course, the Scottish Government could make further changes to rates and bands in future years, so we welcome HMRC’s commitment to engage with stakeholders on a longer term approach which ideally will take much of the effort out of the processes, ensuring as many people as possible benefit from their full entitlement to pensions tax relief.”
AJ Bell senior analyst Tom Selby says: “Savers will still receive tax relief automatically at the basic rate of 20 per cent, and those falling into the starter rate – £11,850 to £13,850 – and basic rate – £13,850 to £24,000 – bands won’t have to do anything in order to receive the tax relief they are due.
“However, anyone who falls into the new intermediate band will need to tell HMRC in order to get the extra 1 per cent 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.
“Some pension schemes operate pension tax relief on a ‘net pay’ basis. HMRC has confirmed these schemes will continue to operate in the same way north of the border as they do now under the new tax regime.”

Scottish income tax – the new bands for 2018/19