Are Scottish taxpayers being disadvantaged by the UK pensions relief mechanism?
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)
20 May 2019
HMRC released its policy on how the pensions tax relief system would cope with the new Scottish tax rates and bands in February 2018. Justine Riccomini explains.
A recent addition to the House of Commons library of research briefings on the subject of pensions reform released in April 2019 appears not to consider the consequential impact that changes would have on the income tax base for Scotland – nor contain any acknowledgement that there would even be an impact.
From 6 April 2018, Scottish taxpayers have been paying income tax by reference to five income bands as opposed to three in the rest of the UK. The new rates and bands for 2019/20 together with corresponding pensions tax relief are set out in the following table and assume that a Personal Allowance of £12,500 can be claimed up to the income limit of £100,000, whereupon it is reduced by £1 for every £2 earned over that limit:
| Band Name | Band Width £ | Band Rate | Pension Tax Relief |
|---|---|---|---|
| Starter Rate | 12,500 - 14,549 | 19% | 20% |
| Basic Rate | 14,550 - 24,944 | 20% | 20% |
| Intermediate Rate | 24,945 - 43,430 | 21% | 20% + 1%* |
| Higher Rate | 43,431 - 150,000 | 41% | 20% + 21%* |
| Top Rate | 150,001 + | 46% | 20% + 26%* |
*The taxpayer can claim the additional tax relief through Self-Assessment or by contacting HMRC if they are not a Self-Assessment taxpayer. There is no need to register for Self-Assessment just to claim additional tax relief.
Starter Rate taxpayers
Taxpayers whose earnings fall into the starter rate band and go no higher (or who have no earnings) pay income tax at 19% on their earnings but the payments they make into a pension scheme are eligible for tax relief at 20%. Even though more tax relief is given than has been paid, HMRC will not be clawing this back from the taxpayer or pension provider.
Intermediate, Higher Rate and Top Rate Taxpayers
Tax relief is given at 20% in tax relief at source arrangements (see below) and the additional 1%, 21% and 26% tax relief can be claimed under Self-Assessment if the taxpayer is already within the Self-Assessment regime. However, if the taxpayer is not already within Self-Assessment, there is no need for them to register for Self-Assessment just to claim the additional tax relief. The taxpayer can simply contact HMRC directly and claim the relief.
Tax Relief at Source Arrangements
Pension scheme operators were advised by HMRC to continue to claim 20% tax relief on any tax relief at source pension payments which are made by starter rate taxpayer scheme members. HMRC does not recover the 1% difference and the Scottish Government bears the cost of this additional tax relief.
Net Pay Arrangements
Where an employee has pension deductions taken out of their pay by the employer before the deduction of income tax, this is known as a net pay arrangement. Both this method and the “Relief at Source” methods are eligible for relief in all registered personal and stakeholder pension schemes. Because the employee has not paid any tax on the pension payment under a net pay arrangement, the correct amount of tax relief is automatically applied, regardless of tax band. There is no need to take any action or reclaim tax relief from HMRC. Read on for further information.
Does HMRC adjust tax codes or make a reimbursement via payroll or directly to the taxpayer?
The HMRC bulletin does not cover this point but we understand it is paid directly to the taxpayer.
What information do tax payers need to provide to HMRC?
The bulletin only says that taxpayers should “contact” HMRC or claim the relief through Self-Assessment. Details of the information to be gathered before contacting HMRC are not specifically listed, but presumably, payslips/P60s and evidence of being a Scottish resident are required.
How does the additional tax relief find its way to the pension scheme if the tax payer wants it to?
This is not covered in the bulletin, but ICAS understands that the taxpayer must pay the money in themselves. It is not known how likely this is to happen given the amounts, but it could impact on future pensions savings – every little helps, as the saying goes – but this consequence appears to disadvantage Scottish Taxpayers in spite of the Government drive to encourage pension savings.
Concerns
ICAS is concerned that pension savers are missing out on the full tax relief they are entitled to unless they are in SA. This is because it is difficult to conceive of a communications strategy which would be capable of alerting non-Self-Assessment taxpayers that they need to contact HMRC. In all likelihood, most will have no idea what a relief at source arrangement is.
It would be interesting to know whether members paying into relief at source schemes who were previously outside of self-assessment are benefiting from the additional tax relief they are due. It is vital that the Scottish Government, HMRC, employers or pension providers have robust communications strategies in place to ensure members of relief at source schemes aren’t missing out.
Wider aspects
In a broader context, the UK Government has focused on making pensions tax relief more progressive - but there appears to have been unintended consequences within the labour market. For example, an investigation by the Financial Times into the impact of the annual allowance taper makes a link to a trend whereby hospital doctors have been unwilling to accept extra shifts, even where that payment is non-pensionable.
ICAS has made representations to HMRC about these issues. Why not let us know what is happening to pensions relief for Scottish taxpayers in your practice, by feeding back on this article?