The Scottish government must provide “urgent clarification” on the effect its new tax rates will have on Scottish pension contributors.
Under the new income tax bands, announced today, 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 to £13,850.
Aegon pension director, Steven Cameron, has urged the Scottish government to give “urgent clarification” for those paying the new rate of tax.
Cameron said: “The introduction of additional tax bands creates uncertainty about how these will be applied to pension tax relief.”
The new system, which works out as less tax paid per head than the rest of the UK, means that different calculations of tax relief for pension contributors will have to be calculated, delivering a headache for consumers, advisers and pensions providers.
Pension providers will be able to claim basic rate tax relief and contributions to ensure they have the correct rate of tax on income at the start of the 2018/19 tax year.
According to the Scottish government, the new 21 per cent band could mean 898,000 people could reclaim the extra 1 per cent tax relief.
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.
Cameron added: “Currently pension tax relief means the cost to a 20 per cent taxpayer of £100 pension contribution is £80, and £60 for a 40 per cent taxpayer. For personal pension schemes, pension providers currently collect contributions net of basic rate tax, which remains at 20 per cent across the UK, with individuals claiming extra relief through tax returns.
“We now need urgent clarification that those paying 21 per cent, 41 per cent or 46 per cent will now be entitled to more relief. But perhaps even more importantly, the Scottish government must make clear that those paying 19 per cent won’t have to pay something back to the tax man!”
AJ Bell head of technical resources, Gareth James, doesn’t believe that the new 19 per cent taxpayers would have to repay the 1 per cent tax relief that has been reclaimed.
He said: “Keeping the Scottish basic rate at 20 per cent keeps things a lot simpler than they could have been if they’d change it to anything else. We’d expect 21 per cent taxpayers will have the option of reclaiming the extra 1 per cent.
“It seems unlikely that 19 per cent taxpayers would have to repay the 1 per cent that has been over claimed.”
With regards to the higher and top rate of tax changes, James believes that this will make pensions contributions slightly more attractive for Scottish taxpayers than those in the rest of the UK.
“The big question is, how difficult will this be and will people bother? Someone earning £30,000 and contributing 10 per cent of their salary would pay in £2,400, get tax relief at source of £600 and can then reclaim an extra £30. They might feel it is not worth reclaiming the £30 but if they contribute to a pension for 40 years those £30 will add up. If they were invested somewhere else each year for that period it could be worth £3,805", James added.
According to Scottish finance secretary Derek Mackay, there will be a rise of £366m more than corresponding block grant adjustment under the fiscal framework.
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