Scotsman Money: Scott Snedden, director at Waverton, unveils his firm’s new monthly column

Did you know that by simply boosting your annual pension investment you could reduce your taxable income rate bands?
Image: Adobe StockImage: Adobe Stock
Image: Adobe Stock

This is particularly significant for Scottish higher earners who face a new 48 per cent top rate of income tax from 6 April.

Welcome to my first Wealth Confidential column, a new monthly investment feature on behalf of award-winning wealth managers Waverton in partnership with Scotsman Money.

The Oxford Dictionary definition of confidential is “entrusted with private or restricted information.” In short, we plan to tap into more than 200 years of combined financial planning and investment expertise within our three offices in Edinburgh, Glasgow, and London. We aim to provide Scotsman readers with original and topical ideas to help them grow, protect and tax-efficiently manage their wealth.

Saturday, 6 April, 2024 is an important date in the diary for all Scottish taxpayers. That’s the day that they will have to start juggling with up to 12 different tax rates and 10 tax bands. It’s the day that income tax rates in Scotland diverge even further from the rest of the UK. And not in a good way.

A new “Advanced” 45 per cent tax band will be introduced by the Scottish Government for those earning between £75,000 and £125,140. According to the Scottish Fiscal Commission, that will financially impact 114,000 Scottish workers. And for the almost 50,000 Scots who earn more than £125,140, their top marginal income tax rate will rise to 48 per cent from the current 47 per cent.

That new top rate is now almost 7 per cent higher than that for similar high earners in the rest of the UK and, based on analysis by the Chartered Institute of Taxation, will mean a minimum additional annual tax bill of £5,231.81 for each of them.

The intermediate income tax band has also been frozen, while starter and basic rates are increasing by inflation. This will create what is called “fiscal drag”. That is when wages rise but income tax thresholds do not, meaning that many more Scots workers will now be brought into these new higher bands of income tax.

Thankfully, there is an alternative solution. Two recent significant changes to pension legislation could come to your rescue if mitigating these new tax rises is your objective.

For those who are not subject to the tapered annual allowance or the money purchase annual allowance, your annual allowable contribution to a tax-efficient pension plan is now a generous £60,000 a year.

The second, which will come into effect on the same day as these tax rises, is the removal of the cap on how much your pension pot can grow in value before it is taxed. So, you can now safely invest the maximum each year into your pension pot.

Maximising your annual pension contributions could be the simple answer to combatting the new Scottish tax rises.

You will already be aware that paying into a pension plan is wise if you are to safeguard your quality of lifestyle in retirement. But these new differential income tax increases also highlight just how effective your pension contributions will now be in reducing your annual income tax bill.

And Scottish pension investors can now get up to 48 per cent tax relief.

The UK Government tops up your personal investment into your pension plan each year with a 20 per cent basic tax relief. This extra contribution will uplift your pension pot value. The good news is that after 6 April Scottish higher rate taxpayers can now claim back up to a further 28 per cent tax relief pension pot boost, depending on the new rate of tax that they will now pay.

So, if you earn £100,000 a year, and can afford to make an annual pension contribution of £40,000, there are now two major benefits.

First, you will get a substantial tax relief bonus boost to your retirement pot.

Second, you will also reduce your taxable income from the new “Advanced” tax band to the lower “Higher” rate one, saving you £17,550 in tax payments next year. This is because your Scottish taxable earnings are net of any pension contributions.

Pensions are certainly not easy to understand as the rules keep changing and you may even have pension funds from previous employers that are not currently actively managed or reviewed as part of your wealth.

If you are interested in looking further into how this solution might work for you, then please seek professional independent financial advice.

That advice could transform 6 April 2024 from a new tax nightmare into a red letter day for you and your family.

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