Pension experts have called for “urgent clarity” regarding tax relief following the introduction of additional income tax bands in the Scottish Budget.
Steven Cameron, pensions director at financial services giant Aegon, said the move created uncertainty about how the bands would be applied to pension tax relief.
He said: “Today’s Scottish Budget announced new rates and bands of income tax for those deemed as Scottish taxpayers. For those earning above £33,000, this will mean their income tax will go up from next April and their take-home pay will reduce. “This signals the Scottish Government is making greater use of its devolved tax raising powers and means an increasing number of Scottish taxpayers are paying higher income tax than those earning the same elsewhere in the UK.
“The introduction of additional tax bands creates uncertainty about how these will be applied to pension tax relief.
“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!”
Rachel Vahey, product technical manager at Nucleus, said: “Pension contributions receive tax relief, so if an individual’s tax rate increases then theoretically the relief will also increase. “This means some Scottish residents will receive a bigger boost to their pension contributions than others in the UK. Although, the difference may be too small in reality to influence Scottish residents’ behaviour to increase the amount they save for retirement.
“Introducing varying rates of tax relief between different parts of the UK may open up previous discussions on the future of pensions tax relief, and whether to sever the link between income tax and pensions altogether.”
Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “A seismic overhaul to Scottish income tax looks set to provide opportunity for those saving for retirement. All of a sudden the incentive to save for retirement is now greater in Scotland for those earning over £24,000 and those earning between £11,850 and £13,850 than the rest of the UK.
“We could see canny Scots deferring their pension contributions until the new tax year in order to benefit. Of course this relies on the legislation being passed which will not be known until February.
“With only basic rate tax relief claimed automatically by pension providers there will be huge numbers of Scots forced into filling in a tax return.
“Pension schemes will be rushing to ensure they can explain the different rates of tax relief in a coherent manner. Whilst these changes are clearly wider ranging than pensions, added complexity simply diverts resources from where they can do most good, by helping people take individual control of their retirement plans.”
Jon Greer, head of retirement policy at Old Mutual Wealth, said: “This show of Scottish power, while somewhat inevitable, exacerbates an already hideously complex tax system.
“It will cause short-term havoc as Scottish tax payers may end up receiving the wrong amount of pension tax relief. Worse still, if clarification on how it impacts pension tax relief is not given swiftly, it may hurt the success of auto-enrolment.”