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Scottish Income Tax loophole boosts pensions by thousands

Higher tax payers could boost pensions by over £8,500

A loophole in the new Scottish Rate of Income tax could boost the government top-up on pensions for savers in the country. 

All taxpayers (and non-taxpayers) earn ‘tax relief’ on their pension contributions as an incentive to save for their retirement.

The tax relief you get is equivalent to the income tax rate you pay – so a basic-rate taxpayer gets 20% tax relief, a higher-rate taxpayer gets 40% tax relief and an additional-rate taxpayers gets 45% tax relief.

From 6 April 2018, income tax in Scotland will be charged at a different rate to the rest of the UK for the very first time; introducing two new tax bands ‘starter’ and ‘intermediate.’ Higher and top rate taxpayers will also be made to pay more than their counterparts in the rest of the UK.

However, while their income tax bills will be higher, they will be able to get a bigger boost to their pension through increased tax relief.

The boost could see people earning over £50,000 receive more than £8,500 in tax relief over the course of their career, according to broker AJ Bell.

Here, Which? explains how it works.


What are the new Scottish Income tax rates?

The Scottish tax rate overhaul, which was first announced in the Scottish Government Budget last December, was officially confirmed on the 20 February 2018.

From 6 April 2018, income tax in Scotland will be charged at a different rate to the rest of the UK for the very first time.

Two new bands – ‘starter’ and ‘intermediate’ – have been created with a tax rate of 19% and 21% respectively.

The pre-existing higher rate and additional rate will increase by 1p in the pound each, while the basic rate remains unchanged at 20%.

The table below shows the Scottish income tax rates and bands for the 2018-19 tax year.

Tax rate Earnings Rates
Personal tax-free allowance £0 – £11,850 0%
Starter Rate £11,851*- £13-850 19%
Basic Rate £13,851 – £24,000 20%
Intermediate Rate £24,001 – £43,430 21%
Higher Rate £43,431 – £150,000** 41%
Additional Rate Above £150,000** 46%

*Assumes the person is in receipt of the standard UK personal tax-free allowance

**Personal allowance is reduced by £1 for every £2 earned over £100,000

Why Scottish income taxpayers get a pensions boost

Currently, a basic-rate taxpayer making a pension contribution gets 20% tax relief. This means that an £80 contribution to your pension gets topped up to £100.

For Scottish income taxpayers, people paying the starter rate of 19% will still earn 20% tax relief – meaning they pay less income tax but benefit from more pension tax relief.

Intermediate rate taxpayers will be able to claim tax relief at 21% on their pension contributions – a boost of 1%.

And higher-rate and additional-rate taxpayers will be able to claim an extra 1% tax relief too, matching the new income tax rates they pay. This means that:

  • A £100 pension contribution for a higher-rate taxpayer will only cost £59.
  • A £100 pension contribution for an additional-rate taxpayer will only cost £54.

According to the broker, AJ Bell, for someone earning £50,000 and saves 10% of their salary into a ‘relief at source’ pension scheme, the benefit will be £50 a year.

This means that over a typical 40 year career the overall tax relief expected could be worth £8,456.

How can the extra tax relief be claimed by Scottish taxpayers?

Pension schemes can collect the tax relief , which boosts your pension savings, in two ways; ‘relief-at-source’ and ‘net pay’.

A relief-at-source pension scheme sees your pension contributions paid after income tax and National Insurance has been deducted from your pay. Regardless of your level of earnings, your provider will then add tax relief to your pension pot at the basic tax rate.

This means that if you’re saving into a relief at source scheme, the additional tax relief you’re getting will need to be claimed back from HMRC, either by contacting the tax body or by completing a self-assessment tax return.

A net pay pension scheme sees your pension contributions paid before your income is taxed – so you only pay income tax and National Insurance on what’s left.

This means that you might get full tax relief automatically, irrespective of your tax band.

Who pays the Scottish Rate of Income tax?

Only Scottish tax payers have to pay the Scottish Rate of Income tax. HMRC will determine whether or not you are a Scottish taxpayer based in where your main place of residence is.

Your main home is likely to be considered the place where:

  • Your family lives, if you are married or are in a civil partnership
  • Most of your property is located
  • You’ve registered for things such as a GP, bank account and car insurance.

If you move homes – either to or from Scotland – you will need to pay the Scottish Rate of tax if you have lived in Scotland for more than half of the year.

You need to tell HMRC about changes to your personal details so be sure to update them as soon as possible.

To get a head start on your 2017-18 tax return, check out the Which? tax calculator. You can accurately calculate your self-assessment, get tips on where to save and submit your tax return directly to HMRC.

For more information on how pensions tax relief works, take a look at our short video.

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