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February 23rd 2018

Tax relief for pension contributions made by Scottish taxpayers - new guidance

The guidance confirms that members of pension schemes who get pension tax relief through the 'net pay' mechanism will continue to receive relief at their marginal rate of tax. This applies to some employees who contribute to a pension through the PAYE system, where the contributions are deducted before tax is calculated by the employer.

Members of pension schemes whose contributions are not relieved through the net pay mechanism obtain relief in a totally different way, known as 'relief at source'. Under relief at source, for 2018/19 pension schemes will continue to claim tax relief at the rate of 20% for members who are Scottish taxpayers - regardless of the rate of tax paid by the individual.

For pension scheme members who are Scottish taxpayers liable to income tax at no more than the Scottish starter rate of 19%, or who pay no tax, current tax rules will continue to apply. This means that scheme administrators will continue to claim relief at 20% in respect of these individuals, and HMRC will not recover the difference between the Scottish starter and Scottish basic rate.

Pension scheme members who are Scottish taxpayers liable to income tax at the Scottish intermediate rate of 21% will be entitled to claim the additional 1% relief due on some or all of their contributions above the 20% tax relief paid to their scheme administrators.

These pension scheme members will be able to claim the additional relief for 2018 to 2019 by contacting HMRC if they don’t already complete Self Assessment returns, or through their Self Assessment return if they do. HMRC have said they will "engage with stakeholders" to help affected members claim this additional tax relief.

Pension scheme members who are Scottish taxpayers liable to Income Tax at the Scottish higher rate (41%) and Scottish top rate (46%) will continue to be able to claim additional relief on their contributions up to their marginal rate of tax in the usual way, either in their tax return or if they don’t complete a tax return by contacting HMRC.

HMRC have said that, regarding the tax years beyond 2018/19, they will "continue to explore the most appropriate way to cater for the new income tax rates and bands". Whether Scottish taxpayers (and indeed, tax administrators) will have to endure the added complexity of the new income tax bands beyond April 2019 is anybody's guess right now. It looks like HMRC are adopting a 'wait and see' approach.

You can read the guidance here.

If you think you could be affected by the new rules, contact us today. We'd love to help.

Related article: Scottish Budget 2017.

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