The Scottish Parliament has been given tax varying powers under Part IV of the Scotland Act 1998. Section 73 gives the power to fix basic rate for Scottish taxpayers subject to an increase or reduction of no more than 3%. This means that the basic rate of income tax may in future be different in Scotland to that in England and Wales.
This has implications for repayment claims by Personal Pension and Free Standing Additional Voluntary Contribution Schemes.
As a result the Association of British Insurers (ABI) have issued a note following discussions with the Inland Revenue via the consultative groups set up to consider the arrangements for implementation of the Scottish Parliament's tax varying power.
Ministers have agreed the basis for repayment claims by personal pension and free-standing AVC schemes. The approach will involve:-
– scheme administrators continuing to make all repayment claims at the UK basic rate, and
– individuals who are Scottish taxpayers receiving any additional tax relief (or paying any additional tax due) through the PAYE system by a coding adjustment.
The ABI note detailed the following related points which emerged from a recent meeting with the Inland Revenue:
1.Claims Procedure for 2000/2001
This will be manual because the Inland Revenue cannot complete the link between personal pension/FSAVC records and PAYE records in time.
A Scottish taxpayer would have to claim any additional tax relief on PP/FSAVC contributions from his PAYE office.
The ABI has agreed in principle that life offices would write to all employed personal pension holders and FSAVC policy holders about this at the same time as telling them about the impact of the change in UK basic rate tax to 22%. The mailing would not be targeted to Scottish addresses only as this would not be sufficiently accurate.
ABI has indicated to the Revenue that the extra cost to insurers, over and above the UK basic rate mailing, is likely to be marginal.
2. Automatic Procedure for 2001/2002 onwards
The following additional data items are to be included on the annual tax return:-
– premium frequency
– commencement date
Both items are likely to be readily available from the insurer's database and so this would not appear to be a major cost enhancement.
3. Free-standing AVCs
For historical reasons FSAVC tax relief claims are made in bulk not individually itemised as for personal pensions. They must now be brought in line.
Since FSAVC providers are also personal pension providers this does not look like a major exercise for insurers. Some increase in ongoing costs is possible because the Revenue could now query individual FSAVC payments.
Both set up and ongoing costs seem to be quite low.
4. Retirement annuities
The Inland Revenue have concluded that Scottish Variable Rate should not apply to retirement annuities (tax relief on contributions or pensions in payment).
The Scottish National Party (SNP) have campaigned in the lead up to the elections for the Scottish Parliament for a "Penny for Scotland" policy which would result in the Scottish Parliament rescinding the Chancellors proposal to cut basic rate income tax from 23p to 22p next year.
As a result of the elections it is not clear at this stage whether the so called tartan tax, which was reported in April to be backed by 80% of the people in Scotland, will be implemented.