Devolution tax change threatens Scots pensions

Pension relief for half-a-million Scots is at risk. Picture: TSPL

The introduction of a new Scottish rate of income tax in 2016 has led to fears that Scottish taxpayers could miss out on the tax relief currently enjoyed by those paying into private pensions.

Pension relief, which tops up the private retirement funds of 520,000 Scots, is currently claimed back from the UK government.

The potential problem arises because under the terms of the UK government’s Scotland Act 2012, Holyrood will be given the power to impose a different rate of income tax from the rest of the UK.

Currently, those with private funds pay income tax on their earnings before any pension contribution. The pension provider then claims tax back from the UK government at the basic income tax rate of 20 per cent.

In practice, it means that for every £80 an individual pays into a pension, he or she ends up with £100 in their pension pot. Those who pay tax at a higher rate can claim the difference through a tax return or by contacting Her Majesty’s Revenue Customs (HMRC).

The creation of a new tax authority in Scotland and the possibility of differing income tax rates north and south of the Border has led to concerns about administering pension relief properly and HMRC has admitted there is a problem.

Pensions experts have warned that the changes will add enormously to the complexity of the process pension providers will have to go through in order to ensure that Scots receive the relief they are entitled to.

More than a year after the Scotland Act was introduced, Scotland on Sunday has learned that HMRC has still to agree a solution to the problem. HMRC has set up a “technical working group” to look at the issue and is in talks with private pension providers to try to resolve the situation.

Christine Scott, a pensions expert with the Institute of Chartered Accountants Scotland (ICAS), said: “There will be some challenges around tax relief on pension contributions. Taxpayers paying into a pension, employers and the pension scheme administrators need to be geared up to ensure that pensions tax relief is received by individuals at the correct marginal rate of tax.

“This means that administrative arrangements need to identify Scottish taxpayers separately from rest of the UK taxpayers as it should not be assumed that the Scottish rate of income tax and the UK rate will not vary.”

She said that an added problem could be that some individuals may not know if they are classed as Scottish taxpayers or not. She added: “Success depends on individuals knowing whether they are a Scottish or rest-of-the-UK taxpayer and this information being correctly recorded in payroll systems.”

A spokesman for HMRC said the UK government was “committed” to making Scottish taxpayers receive the appropriate relief on their pensions contributions, but admitted that a solution has yet to be worked out.

He said: “We announced last year that Scottish taxpayers would get relief for pension contributions at the correct marginal tax rate, and we will be able to deliver that.

“The correct rate will apply automatically for people who contribute to pensions by deduction from their pay.

“For people who contribute to their pensions directly  (ie those with private schemes), we are talking to the industry about the way of delivering the right relief in the way that works best for all concerned.”

The Scottish Government claimed that the issues raised by the further devolution of income tax added to the argument in favour of independence. A spokesman said: “We have always expressed concerns over the value of introducing the Scottish Rate of Income Tax without giving Scotland the full fiscal powers of independence. Whilst this work is welcome, and lays an effective foundation for the full powers that will come with a Yes vote, we will be monitoring HMRC’s progress closely.”