Pensions tax relief and the new Scottish income tax rates and bands

Glasgow citycentre by night
Justine Ricommini By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)

9 March 2018

HMRC has now released its policy on how the pensions tax relief system will cope with the new Scottish tax rates and bands.  Justine Riccomini explains what this means for Scottish taxpayers.

Update 9 March 2018: The error mentioned in this article when it was first published on 23 February, relating to the Income Limit at which point the Personal Allowance is reduced by, has now been corrected by HMRC.

From 6 April 2018, Scottish taxpayers will pay tax by reference to five income bands as opposed to three in the rest of the UK.

The new rates and bands for 2018/19 together with corresponding pensions tax relief are set out in the following table and assume that a Personal Allowance of £11,850 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

11,850-13,850

19%

20%

Basic Rate

13,851 – 24,000

20%

20%

Intermediate Rate

24,001 – 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) will pay income tax at 19% on their earnings but the payments they make into a pension scheme will be 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 will be 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 have been 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 will not recover the 1% difference and the Scottish Government will bear 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.

Further information can be found in HMRC's newsletter - please note that the newsletter originally contained an error relating to the Income Limit at which point the Personal Allowance is reduced by £1 for every £2 earned.  HMRC had stated this is £150,000.  ICAS pointed this error out to HMRC and it has now been corrected.

Will HMRC adjust tax codes or make a reimbursement via payroll or directly to the taxpayer?

The HMRC bulletin does not cover this point and therefore it is not yet clear how this will be carried out.

What information will tax payers need to provide to HMRC?

At present, 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.

How will the additional tax relief find its way to the pension scheme if the tax payer wants it to?

This has not been covered in the bulletin.

ICAS is concerned that pension savers will miss 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.

ICAS will be making representations to HMRC about these issues.  If you think there are other representations ICAS should be making, let us know.

Topics

  • Pensions
  • Tax

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