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What will Scottish devolution mean for pensions tax relief?

Proposals to hand the Scottish Parliament autonomy over setting income tax rates could have significant ramifications for pensions tax relief, Towers Watson warns.

The Smith Commission, established to develop devolution proposals on behalf of the major political parties north of the border, says Holyrood should have the authority to set its own income tax rates.

The personal allowance will continue to be set on a UK-wide basis under the commission’s recommendations, as will state pensions and national insurance.

But Towers Watson warns if Scottish MPs decide to set a different rate of income tax from the rest of the UK, the basis on which pensions tax relief is paid will be undermined.

Towers Watson senior consultant Dave Gordon says: “The most important change affecting pensions will be the devolution of further income tax powers.

“Tax reliefs will be reserved to the UK, so Holyrood cannot change the structure of tax relief on pension contributions – only the UK Chancellor can do that.

“However, if the Scottish Parliament varies income tax rates or decides that higher rate tax should kick in at a different point on the income spectrum, this will affect the tax relief that Scottish taxpayers get on their pension contributions.”

This would also have significant administrative implications for pension schemes, according to Gordon.

“Pension schemes would need to identify who is a Scottish taxpayer, which is determined by where people live rather than where they work, “ he says.

“Personal pension schemes and the National Employment Savings Trust would have to claim different top-ups from HMRC for savers who are Scottish taxpayers.  For defined benefit schemes, the challenge would be to deduct different amounts of tax from the pensions they pay out.”

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