One of the most intriguing matters to arise recently was the impact of the Scotland Act 2012, which received Royal Assent on May 1. This act introduces the prospect of a Scottish rate of income tax, effective from 2016.
Broadly, the Scottish Parliament will be able to set a rate of income tax applicable to Scottish taxpayers. This will relate to individuals and will apply to their non-savings income. The calculation will be to reduce the tax rates levied by the UK Government by 10p in the pound and for the Scottish Parliament to replace that with its rate.
For example, if it was to decide that the Scottish rate should be 11p in the pound, then, based on current UK rates, basic, higher and additional tax rates in Scotland would be 21 per cent, 41 per cent and 51 per cent respectively. To be a Scottish taxpayer, the individual must be resident in the UK and then have their main place of residence in Scotland. If they do not have a main place or residence or they have two places of residence in the UK, then they will be Scottish taxpayers in a tax year where the bigger proportion of the year has been spent in Scotland.
Advisers, employers and pension providers cannot ignore this because it has potential implications for an individual’s tax relief and personal tax calculations.
Where contributions are paid by deduction from gross pay before income tax, typically through an employer-sponsored occupational pension scheme, Scottish taxpayers will get the relief at their marginal rate, whatever that might be, as they do now. So too will any who are making contributions on a gross basis through old retirement annuity contracts where tax relief is claimed through self-assessment.
The complication could arise where individuals make contributions net of basic-rate relief through net pay such as group personal pensions/ stakeholder pensions and in due course Nest.
As there is time to plan before the Scottish rate of income tax becomes effective, the Government will look for ways to incorporate the potential differential in rates within the system.
It wants to do this by minimising the administrative cost on the pension industry and further consultation will follow.
It is important to keep abreast of developments so that correct information and advice can be provided. HMRC has issued a technical note which can be found at http://www.hmrc.gov.uk/news/technote-scot-taxrate.pdf.
There is also an update in the content of the Pension Schemes Newsletter which can be found at http://www.hmrc.gov.uk/pensionschemes/news letter54.pdf.
This could of course be the thin end of the wedge and we could see even more divergence in tax regimes in the years to come.
Mark Pearson is business development director at Origen Financial Services