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Claire Trott: How Scottish tax reform impacts pensions

TrottNew income tax rates are causing discrepancies between pension schemes

Changes to taxation in Scotland is having an impact on many cross-border issues, and pensions have not escaped unscathed.

Not only are administrators having to record and report their Scottish members but we now have greater disparity on the tax relief front.

Pensions and property

In England, stamp duty land tax is not charged on transfers of property between pension schemes.

In 2016, we were in a position where the equivalent tax in Scotland – the land and building transactional tax – was charged on such transfers.

This meant that, regardless of where your pension was based, if your commercial property was in Scotland, the cost to transfer between pension schemes was significantly more, even if the scheme charges were the same.

The headache of Scottish income tax change

Thankfully, after significant lobbying by the industry, Revenue Scotland conceded and reversed its guidance, restoring harmony in this area late in 2017.

Some will now be in a better position to transfer to a new scheme and those that bit the bullet and did it anyway should get a refund. But perhaps this is a warning against the knock-on effect that can be caused by having different decision makers involved in cross border issues.

Relief at source contributions

Relief at source contributions are where the scheme reclaims the basic rate of tax on all contributions paid personally up to the member’s UK relevant earnings.

At 20 per cent, this is simple in England and Wales (see table 1). Those who pay higher or additional rate income tax need to reclaim the extra amount through self-assessment or by contacting HM Revenue & Customs to have their tax code amended accordingly. This is pretty straightforward.

In Scotland, there are now more bands to contend with. The scheme will still always reclaim the basic amount of 20 per cent. Should the basic rate change, the scheme will need to reclaim that new rate for those individuals identified as living in Scotland.

The main problem, however, is that there is a band below basic rate but above the personal allowance where individuals pay just 19 per cent tax. This means those individuals will be getting more tax relief than they will actually be paying (see table 2).

The 19 per cent band is only £2,000 above the personal allowance but it means those in Scotland on the same salary and paying the same pension contributions as someone in England will be paying less tax overall.

Scotland also has the intermediate rate of tax of 21 per cent, the higher rate of tax at 41 per cent and the top rate of tax at 46 per cent. This means anyone earning over £24,000 will need to reclaim the additional tax relief that is due to them.

Net pay contributions

Contributions paid under net pay schemes require less interaction from the individual because they are paid to the scheme before tax is deducted.

This means full tax relief on all contributions paid, but only if tax was due in the first place. Higher earners will not have to reclaim any extra tax relief on their contributions, as all the relief will be in the scheme.

However, those who are starter rate taxpayers in Scotland will only get tax relief at 19 per cent and not the 20 per cent that those in relief at source schemes get by default.

Pensions tax relief warnings as Scotland confirms income band changes

There is not much an individual can do about this if the only scheme their employer offers is a net pay scheme. However, if all schemes were to be relief at source, more tax relief would be paid to the lower earners, which can only be a good thing when we are trying to encourage them to save.

This could be seen as an argument to bring in flat rate tax relief, but this could just create further disparity between England and Scotland on the tax front, because it would not automatically follow that both sides of the border would agree.

Claire Trott is head of pensions strategy at Technical Connection


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There is one comment at the moment, we would love to hear your opinion too.

  1. Andrew Macintyre 29th March 2018 at 9:40 am

    I wonder how many 21% taxpayers in Scotland will actually claim back their 1% tax relief on pension contributions.
    Salary sacrifice, if offered would save a lot of hassle.

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