HM Revenue & Customs has published guidance on how new income tax bands in Scotland will affect pension schemes and their members.
The note is a response to the Scottish Government’s confirmation it will introduce five income tax bands for 2018/19.
Pension savers in Scotland currently receive pension tax relief at their marginal rate but this will become more complicated with these reforms.
The note from HMRC relates to relief at source schemes where tax relief is applied to contributions after members have paid income tax.
This is different from schemes that calculate on a net-pay basis, which means pension contributions are deducted before income tax is applied to a member’s pay.
The guidance explains that savers who are starter rate tax payers and earn £11,850 to £13,850 will automatically receive 20 per cent tax relief.
The same goes for basic rate tax payers who earn £13,850 to £24,000.
However intermediate rate tax payers who earn £24,000 to £43,430 will need to tell HMRC about their tax bracket in order to get the extra 1 per cent of tax relief and the full 21 per cent they are entitled to.
According to the Scottish Government 874,000 people fall into the intermediate tax band.
Nucleus product technical manager Rachel Vahey says the number affected will probably be much lower than estimated.
She says: “To be affected the person would have to be paying into a pension scheme, and that pension scheme would have to operate relief at source tax relief. So the numbers affected will be much lower.”
Vahey also explains the clarification from HMRC is likely to go down well with advisers and providers.
She adds: “It’s good HMRC has reacted so quickly to the confirmation of the new Scottish income tax rates, and its speedy response will help advisers and providers whose clients are resident in Scotland understand the implications for relief at source.
“Continuing to add 20 per cent tax relief to everyone’s pension contributions is definitely the simplest approach.”
Vahey questions whether an intermediate taxpayer earning £25,000 would be bothered to reclaim the additional tax relief.
She continues: “Although this will only be a very small amount, it is still an additional payment they are due. It may have been a simpler approach for intermediate taxpayers if HMRC could instead make an automatic adjustment.”
Aegon pensions director Steven Cameron says: “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.”