Nucleus Financial reacts to the Scottish Parliament announcement of draft changes to income tax
Rachel Vahey, product technical manager at Nucleus, said:
“The Scottish budget proposes introducing two new rates of income tax – a starter income tax rate of 19% for the first £2,000 income (above the personal allowance) and an intermediate income tax rate for earnings between £24,000 – £44,273 of 21%. It also proposes increasing tax rates for higher rate and additional rate taxpayers.
“Pension contributions receive tax relief (generally up to the annual allowance of £40,000 or the individual’s earnings if lower) so if an individual’s tax rate increases then theoretically the relief will also increase. This means some Scottish residents will receive a bigger boost to their pension contributions than others in the UK. Although, the difference may be too small in reality to influence Scottish residents’ behaviour to increase the amount they save for retirement.
“Those who contribute to a scheme that operates relief at source receive 20% tax relief direct from HMRC to their pension scheme, and can claim any tax relief above 20%. They usually do this through their self-assessment tax return, although they can also notify HMRC direct who may adjust their tax code to give them this additional relief, provided they are not an additional rate taxpayer. However, this relies upon individuals taking action to claim their tax relief, and unfortunately, it’s doubtful many people earning just above £24,000 will bother, so missing out on the tax relief due them. Those paying higher rates will probably carry on claiming tax reliefs as they do now.
“In addition, although a lower rate of tax of 19% has been introduced for initial earnings above the personal allowance, we would assume Scottish pension scheme members will continue to get 20% relief on all their pension contributions.
“Introducing varying rates of tax relief between different parts of the UK may open up previous discussions on the future of pensions tax relief, and whether to sever the link between income tax and pensions altogether.”