Six Scottish tax rates offer little source of relief

Estimated reading time: 4 minutes

About to tuck into a freshly-cooked portion of fish and chips, whilst stood on the pier at Southwold, my eyes darted around the serving hatch in search of some tomato sauce. A pang of dread struck me, as I looked in vain for that reassuring small red bottle. Had the fish and chip shop run out of that mandatory condiment? And then I saw it; surreptitiously hiding behind the large plastic salt cellar. Phew - what a relief!

This relief at sauce reminded me of a couple of HM Revenue & Customs (HMRC) papers that were issued towards the end of last year; one referring to changes in the administration of ‘Relief at Source’ for SIPP and SSAS scheme administrators, and the other focusing on the ‘Scottish Rate of Income Tax’. Both are interrelated with each other. The proposals outlined in the Scottish Budget in December 2017, where full advantage was taken of Scotland’s post-devolution referendum powers to set its own income tax rates and bands, could create some challenging issues for scheme administrators, now that the Budget proposals have been approved by the Scottish Parliament.

The changes to the administration of Relief at Source (RAS), with effect from 6 April 2018, are outlined in a statutory instrument entitled, ‘The Registered Pension Schemes (Relief at Source) (Amendment) Regulations 2018’. In a nutshell, this is establishing an earlier due date of 5 July for the filing of both the ‘annual return of individual information’ and the annual tax relief claim, as well as introducing a timescale for the repayment of any excess tax relief received in an interim claim, with interest chargeable on any late repayments of the excess relief, once identified.

The principal reason behind these changes is to give HMRC sufficient time to identify pension scheme members who are resident in Scotland, where the ‘Scottish Rate of Income Tax’ differs from the rest of the United Kingdom. 

That ‘where’ became a ‘when’ last month, once the Budget proposals were passed by the Scottish Parliament, and is set to cause both HMRC, and pension providers that operate relief at source, additional complexity into the bargain. In the Scottish Budget, the government proposed no less than six tiers of income tax rates for Scottish residents; only two of which match the rates for the rest of the UK, as shown in the table below;

Name of band Band (£) Income Tax Rate
Nil Up to £11,850 0%
Starter 11,851 to 13,850 19%
Basic 13,851 to 24,000 20%
Intermediate 24,001 to 44,273 21%
Higher 44,274 to 150,000 41%
Top Over 150,000 46%

As HMRC provide basic rate income tax relief of 20% to schemes operating relief at source, with those scheme members subject to higher and additional tax rates typically claiming the difference via their self-assessment tax returns, what do these proposals mean for Scottish residents subject to either the ‘starter’ or ‘intermediate’ rates of tax?

Given that primary legislation states that the tax relief payment equates to the basic rate of income tax, those on the ‘intermediate’ rate would be eligible for an additional 1% of tax relief, whilst those on the ‘starter’ rate would – theoretically – be receiving too much tax relief.

Yet those residents earning £3,600 gross per tax year or less, are still able to contribute up to £2,880 net each tax year, and receive 20% tax relief on the entire contribution!

Fortunately, HMRC released a further newsletter the day after the Scottish Parliament approved the Budget proposals, and confirmed that SIPP (and SSAS) providers operating relief at source could continue to claim basic rate tax relief of 20% for all Scottish residents; regardless of their marginal rate.

"Yet those residents earning £3,600 gross per tax year or less, are still able to contribute up to £2,880 net each tax year, and receive 20% tax relief on the entire contribution!"

This means that, Scottish residents on either the ‘intermediate’, ‘higher’ or ‘top’ rates will be eligible for more income tax relief on their personal pension contributions than taxpayers located in the rest of the UK; a fact that will only serve to increase the amount of tax relief paid out by a cash-strapped Treasury.

In addition, the Welsh Parliament is being given the power to decide their own income tax rates with effect from April 2019, and if they pursue a similar course to Scotland, this will surely serve to bring wholesale changes in both the nature and structure of pension tax relief, one step nearer.

I, for one, was amazed that no changes were made to pension tax relief in the Autumn Budget last year; a fact that I’m reminded of, whenever I walk past our local bookmakers, only to see the proprietor waving, pointing and laughing at me, because of the significant wager that I put on, before Mr Hammond rose to speak in the Chamber on 22 November.

That 50p could have been spent in so many more useful ways.

Oh well – at least the tomato sauce tasted good with my fish and chips.

Which was a relief.

An earlier version of this blog was first published on the SIPPs Professional website