“The decision by the Scottish Government to change income tax rates and bands for Scottish taxpayers has implications for pension schemes and their members. HMRC has provided an explanation of the knock-on consequences for those entitled to pensions tax relief. While HMRC has taken the most sensible and fair approach, there are implications for many people and some will need to take action to obtain their full entitlement.
“Tax relief can be granted in 2 ways. Some schemes operate a ‘net pay’ arrangement with pension contributions coming out of salary before tax is calculated. Here, the approach will continue as at present but this means those paying income tax at 19% will also see a cut in their pension tax relief leaving them worse off that someone in the alternative ‘relief at source scheme’. On the other hand, those facing an increase in their Scottish income tax rate will automatically get greater relief through net pay than at present.
“In ‘relief at source’ arrangements, the pension provider makes the claim for 20% basic rate tax relief with higher rate taxpayers claiming further relief personally, often through tax returns. HMRC has confirmed providers here will continue to collect relief at the rate of 20%. This means those paying 19% or no tax continue to get relief at the 20% level. However, it’s far from ideal that those in Scotland paying 21% income tax will now have to make a specific claim to get the extra 1% relief. While a fair entitlement, the effort to get £10 extra relief for every £1000 of personal contributions will put people off. Of course, the Scottish Government could make further changes to rates and bands in future years, so we welcome HMRC’s commitment to engage with stakeholders on a longer term approach which ideally will take much of the effort out of the processes, ensuring as many people as possible benefit from their full entitlement to pensions tax relief.”
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