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26 February, 2018   |   By Fiona Tait   |   Blog


Scots Wha Hae (and some wha hae not) @Pensionsgirlieblog 26 February 2018

Scots Wha Hae (and some Wha Hae not)Scottish flag.PNG

Sometimes it’s really good to be a Scot.

For example if you are a Scottish resident and earn between £11,851 and £13,850 in 2019/20 you could get an extra 1% tax relief on your pension for free. Happy days!

HMRC confirmed this week that schemes operating under RAS will still reclaim basic rate tax relief for all workers, regardless of whether they wear thistles, leeks or even roses. As the starter rate for Scottish Income tax will only be 19% this means the lucky people who qualify for it will be given more relief than the tax they paid and they don’t even have to claim it back.

Of course you would have to be making a pension contribution, and you would have to be in a Relief at Source (RAS) scheme but that’s the easy bit. Your employer will have set up the scheme already and because you earn more than £11,000[1] you will be automatically enrolled into it. But wait, what if your employer did not foresee the introduction of the starter rate of Scottish Income Tax and enrolled you into a net pay arrangement? Well that’s just hard luck, because you will only get tax relief at the rate of tax you actually paid and no more. Unfair or what?

On the other hand, those who are due to pay the intermediate rate of Scottish Income Tax will also only get 20% relief under RAS. They will be entitled to reclaim the extra 1% they have already shelled out but it won’t happen automatically, leaving me with the thought that HMRC might do very well out of this. Anyone who already fills out a self-assessment tax return will probably fill out the right boxes, but those on PAYE may not realise they have this option unless we SHOUT ABOUT IT.

Chalk and cheese.PNGThis anomaly exists because of the difference between occupational and personal pension schemes. Under an OPS member contributions are deducted before income tax is paid, and the result is that members get relief equal to the rate of tax they would have paid. Under personal pensions contributions are deducted after tax and the scheme reclaims relief at the basic rate of income tax, currently 20%. Leaving aside the fact that the reclaimed tax is paid into the plan later, this system works very well if you are in fact paying income tax at 20%. If you don’t you have to reclaim the difference yourself (or not if you’re a starter rate taxpayer).

Some of us, who are either higher rate taxpayers or don’t trust PAYE to get it right, are used to this and already fill our self-assessment forms. Many of those who will fund themselves in the intermediate bracket may not be and the question is whether they know, or care, that they claim this extra amount.

This is not however the only anomaly for lower-paid individuals. Anyone who earns over £11,000 and up to the personal allowance could find themselves automatically enrolled into a RAS scheme and would receive 20% tax relief under RAS. If however they were enrolled into a net pay scheme they wouldn’t get this relief for the logical reason that they don’t actually pay income tax. It’s not their fault, and it probably wasn’t their choice to be in a net pay scheme anyway. This issue will be exacerbated if contributions are calculated from £1 of earnings, and yet there is still no proposed solution.Scotch.PNG

I will leave you with this thought: If you do not speak Scots, you may ask your Scottish host for a drink of Scotch whisky to celebrate the Calcutta cup. If you are celebrating that is.


[1] Assuming also you are not too young or too old to qualify