Potential changes to the income tax bands in Scotland could cause “pension chaos” for 770,000 taxpayers in Scotland, according to AJ Bell.

In a discussion paper, the Scottish government has outlined four alternative approaches to the income tax system, which could lead to different calculations of tax relief for pension contributors, delivering a headache for consumers, advisers and pensions providers.

One alternative approach includes having up to six income tax bands, differing from the rest of the UK, meaning that the HMRC would have to inform pension providers whether its members are UK or Scottish taxpayers.

Pension providers will then be able to claim basic rate tax relief and contributions, and will have the correct rate of tax on income at the start of the 2018/19 tax year.

However, those who might still be considered UK taxpayers by their pension providers could receive too much in tax relief, resulting in charges later down the road.

AJ Bell head of technical resources, Gareth James, explained: “If the Scottish basic rate of income tax was anything other than 20 per cent, this would result in a potentially large number of people automatically receiving too little or too much pension tax relief on their contributions, potentially meaning they will face tax charges or having to jump through additional administration hoops to deal with the consequences."

According to AJ Bell, if the Scottish basic rate has decreased from 20 per cent to 18 per cent, they would pay in £8,200 net to make a gross contribution of £10,000.

However, if the provider still has the member down as a UK taxpayer, they would claim back 20 per cent tax relief resulting in a gross contribution of £10,250, meaning they will have exceeded their tapered annual allowance by £250.

“Even if the Scottish basic rate of income tax remains at 20 per cent, if Scotland has a larger numbers of income rate bands than exist today or allowances are different, lots of people receiving pensions from their scheme will potentially be taxed on a different basis to the one they were expecting”, James added.

An announcement regarding the suggested changes will be made in the Scottish Budget on 14 December.

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