HMRC clarifies pensions tax relief rules for new Scottish income tax bands

Written by Natalie Tuck
22/02/2018

HM Revenue and Customs has clarified the rules around pensions tax relief for the new Scottish income tax bands, allowing those paying the intermediate rate of 21 per cent to claim back the additional 1 per cent due on their contributions.

In December 2017, the Scottish government voted to change the income tax bands, adding in a third band. Under the new income tax bands, the higher and top rate will increase by 1 per cent, to 41 per cent and 46 per cent, while a new intermediate tax rate of 21 per cent will be introduced for those earning between £24,000 and £44,273. In addition, a new starter rate of 19 per cent will be introduced on £2,000 of taxable income, between £11,850 and £13,850.

Today, 21 February, HMRC has issued guidance surrounding pensions tax relief for the new income tax bands. For example, for members of net pay schemes, tax relief on the contributions will continue to be given by default at members’ marginal rate of tax, including the new and newly increased Scottish rates.

However, for relief at source schemes, HMRC said pension scheme members who are Scottish taxpayers liable to income tax at the Scottish intermediate rate of 21 per cent will be entitled to claim the additional 1 per cent relief due on some or all of their contributions above the 20 per cent tax relief paid to their scheme administrators.

“These pension scheme members will be able to claim the additional relief for 2018 to 2019 by contacting HMRC if they don’t already complete self assessment returns, or through their return if they do. HMRC will engage with stakeholders to help affected members claim this additional tax relief,” HMRC said.

Pension scheme members who are Scottish taxpayers liable to Income Tax at the Scottish higher rate (41 per cent) and Scottish top rate (46 per cent) will be able to claim additional relief on their contributions up to their marginal rate of tax in the usual way, either in their self assessment tax return or if they don’t complete a tax return by contacting HMRC.

For pension scheme members who are Scottish taxpayers liable to income tax at no more than the Scottish starter rate of 19 per cent, or who pay no tax, current tax rules will continue to apply. This means that scheme administrators will continue to claim relief at 20 per cent in respect of these individuals, and HMRC will not recover the difference between the Scottish starter and Scottish basic rate. HMRC said it will “continue to engage with stakeholders to help establish an approach for the longer term”.

Commenting, Aegon pensions director Steven Cameron has noted that while the Scottish government is free to make decisions on its country’s income tax bands, it is HMRC, pension schemes and their members who need to deal with “the knock-on consequences for pensions tax relief”.

“Today’s clarification from HMRC is sensible and as we’d expected but does have implications for many people,” Cameron said. “The confirmation that net pay arrangements will continue as at present means those seeing a cut in their income tax rate to 19 per cent will also see a cut in their pension tax relief leaving them worse off than someone in a relief at source scheme. On the other hand, those facing an increase in their Scottish income tax rate will get greater relief through net pay than at present.

“For relief at source arrangements, again it makes sense for providers to continue to collect relief at the rate of 20 per cent. This means those paying 19 per cent or no tax continue to get relief at the 20 per cent level. However, 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 it’s only fair that individuals should have this entitlement, the mechanics are far from ideal. The effort for the individual as well as for HMRC looks disproportionate to the extra relief received, which for someone paying £1000 personal contributions, equals £10. For this reason, and bearing in mind the Scottish government could make further changes to rates and bands in future years, we welcome HMRC’s commitment to engage with stakeholders to help establish an approach more appropriate for the longer term.”

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