Do you have any clients who are Scottish income taxpayers?

26 March 2018

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Jim Grant explains the pensions impact of the new Scottish rate of income tax. The bands and rates of Scottish income tax for the 6 April 2018 to 5 April 2019 tax year have now been confirmed.

These now differ significantly from the rest of the UK.

Map of UK with new income tax rates for Scotland and rest of UK

The impact on pensions tax relief 

So what effect will this have on the tax relief available on pension contributions paid by Scottish income taxpayers?

Well the good news is that the basic rate for Scottish taxpayers remains at 20%. So for relief at source pensions, the amount of basic rate tax relief to be added to the pension savings by the provider is the same as the rest of the UK.

Examples of relief at source pensions are personal pensions or group personal pension plans.

However Scottish income taxpayers will pay tax on the first £2,000 of taxable income at 19% so are receiving more tax relief on that band than they’re paying in tax.  In a newsletter, HMRC confirmed that they won’t ask for the difference back.  At first sight this would appear remarkably generous of them but the maximum sum involved would be a princely £20 each year.

Scottish income taxpayers paying tax at the ‘intermediate’ rate of 21% will have to claim the extra tax relief via their tax return or by simply writing to HMRC.  This means that many people who up until now had pension contribution tax relief at basic rate only, will now have to claim the additional amount of tax relief from HMRC for the first time.  You should make your clients aware of this.

For Scottish income taxpayers, the higher rate of income tax is now 41% and the additional rate 46%. So claiming the extra tax relief becomes even more valuable to them.  Clients who are already paying higher or additional rate tax and making pension contributions should already be claiming their additional tax relief via their self-assessment tax return or by writing to HMRC.

Occupational schemes

Occupational scheme members make pension contributions through the net pay arrangement, where the employer deducts the contribution from salary before deducting income tax. So they get immediate tax relief on their contributions at their marginal rate of tax and don’t have to claim any tax relief from HMRC.

Salary exchange

A similar advantage applies to salary exchange with the additional benefit of a saving on National Insurance contributions for both employer and employee on the salary exchanged.

Our salary exchange calculator will apply the new rates and bands for Scottish taxpayers from 6 April 2018.

Find out more

 As you prepare for the new tax year, you can find more pensions technical information in technical central.

About the author

Jim Grant

Senior Product Insight & Technical Support Analyst

Jim has worked in Financial Services since 1969 with experience in training, sales training, consultancy work and technical support.

Last updated: 26 Mar 2018

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.