Scottish income tax and pensions: a short guide

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Changes to the rate of income tax for Scottish residents, will bring additional complexity for members of certain workplace personal pension schemes.

These changes, introduced from April 2018, follow legislation that allows Scottish parliament to set its own income tax rates. Whether Scottish rate tax payers will need to take any action, will depend on the type of pension scheme they pay into.

What are the Scottish income tax rates?

The new income tax rates for the 2018/19 tax year are:

Band Band name Rates (%)
Over £11,850*-£13,850 starter rate 19
Over £13,850-£24,000 basic rate 20
Over £24,000-£44,273 intermediate rate 21
Over £44,273-£150,000** higher rate 41
Above £150,000** top rate 46

*Assumes person is in receipt of the Standard UK Personal Allowance

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

Will Scottish rate tax payers need to do anything different?

There will be no changes for those who use a net pay scheme (most trust based schemes), and companies who operate salary sacrifice. Tax relief is automatically delivered through payroll for both these arrangements meaning scheme members won’t need to do anything.

However, there will be changes for employees who pay into a relief at source pension scheme (most personal pensions).

For 2018/19, Aviva will continue to receive 20% relief on employee contributions from HMRC. This is because the basic rate of income tax in Scotland remains 20%.

If scheme members pay more than 20% they will need to reclaim the additional relief tax via an end of year tax return.

The amounts due may be small e.g. a member earning £27,000 and paying automatic enrolment minimum contributions of 3% of qualifying earnings would be due a rebate of £6.291.

What can employers do to help their Scottish employees?

HMRC has issued guidance on Scottish Rate Income Tax. Employers may wish to pass on details of how employees can contact HMRC to claim additional tax relief. Employers will not be able to claim the additional tax relief on behalf of their employees.

Salary sacrifice

Salary sacrifice is an agreement with each employee that, in return for a reduction in pay, the employer will make an additional pension contribution of the same value. This avoids the need for employees to claim any tax relief from from HMRC. As they do not receive the income directly, no income tax is due on it.

As employer contributions are exempt from income tax and national insurance, employers and their employees will save the cost of their national insurance contributions.

There are things to watch out for:

  • It isn’t possible to sacrifice pay to a level below national living wage.
  • Workers who don’t pay tax will be worse off as a result of salary sacrifice, unless employers use part of their own national insurance contributions saving to increase the amount they contribute for their employees.

If either of these two categories are included because of an employer’s pay structure or demographic, it is possible to only offer salary sacrifice to those employers who would benefit from the change. Salary sacrifice won’t be an answer for every employer, but for some it could have the double benefit of simplifying things for their Scottish employees, as well as saving them money.

If you need any additional information around Scottish income tax changes and pension contributions, get in touch with your Aviva contact, who’ll be happy to help.

1((£27,000-£6,032 x 0.03)x 0.01 = £6.29 [Lower earnings limit £6,032]

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