The Scottish Rate of Income Tax and what it means for your pension

The introduction of the Scottish Rate of Income Tax (SRIT) created a great deal of noise when it first went ‘live’ in April of this year. Taxation – by its very nature – tends to attract heated debate and analysis and Scotland’s new system has followed that trend.

While much of the discussion centred on whether or not income tax payers would be better or worse off, there has been far less attention on pension tax relief, prompting the Scottish Government to recently clarify exactly what the changes will mean in this respect.

Crucially, the message has been that no Scottish taxpayers should be worse off in terms of tax relief. While the revised bands have resulted in some people paying more to HMRC and some paying less, or the same, the SRIT was never designed to have any significant impact on pension contributions.

However, while it may be reassuring to note that your pension tax relief should not be negatively affected by the changes, you may need to take a number of proactive steps to ensure you are not unnecessarily penalised, as Derek Blaik, head of Wealth Advisory in Scotland at Grant Thornton UK explains: “There were a number of question marks hanging over how HMRC would cope with the pension tax relief system, following the introduction of the SRIT and this has now been largely clarified. The negative aspect of the change is that individuals may need to explore their own personal situation and contact HMRC to ensure they’re receiving the relief they’re entitled to. For pensions, providers will still usually apply 20 per cent tax relief at source. It will be up to the individual to claim more tax relief based on the SRIT bands. In other words, they may have to contact HMRC to have the increased relief taken into account and ask for their tax codes to be adjusted.

“The higher rates does mean additional pension tax relief for some and that could be good news for higher payers to offset the increase in income tax. However, additional 46% payers could still be caught by the reduced annual pension allowance (AA) which decreases from £40k to £10k per annum depending on income levels. This point is important because salary sacrifice arrangement can affect the AA as – in some cases – the amount sacrificed is added back into the income calculation.”

The changes could have a significant financial impact on higher tax payers, prompting most to take action to ensure they’re not being unnecessarily penalised. There are fears that lower tax payers may not bother to contact HMRC to claim the additional pension relief they’re entitled to after judging that the financial gain isn’t worth the pain.

Anita Eunson, head of employer solutions tax at Grant Thornton UK in Scotland, added: “With so many people affected by the reforms, there could be added pressures on HMRC and it could leave some taxpayers deciding to leave the changes in the hands of the tax man, resulting in them being unnecessarily out of pocket, even if that figure is relatively small. What is important is that everyone should look at the changes and what they mean for them personally. For example, reduced dividend allowance of £2,000 will pull more into the tax net but some people may be completely unaware of this.”

“The key message is not to panic. As HMRC and the Scottish Government have been keen to stress, most people should not be negatively impacted in terms of pension tax relief, and some may even benefit from the changes. Options such as investments geared to growth may now become more attractive than previous models such as those that pay out dividends, but it’s important to study your own bespoke position and, if you feel it’s necessary, seek assistance from experts like our team at Grant Thornton who can provide detailed insight and advice to ensure you follow the rules and aren’t penalised unnecessarily.”