In April 2017 the Scottish Rate of Income Tax was introduced, which may have gone largely unnoticed by many Scottish taxpayers as the overall basic rate remained at 20% - albeit 10% going to HMRC and the other 10% to Revenue Scotland.

Further changes from April this year are much more likely to be felt and there are a few quirks in the system which may surprise some, especially those that cross the border.



From April Scottish residents will have not three, but five rates of income tax. The personal allowance will be aligned with the rest of the UK (unlike this year), with a starter rate of 19% for earnings between £11,850 and £13,850. So a 1% saving on £2,000, giving a maximum saving of £20 a year – hardly seems worth the effort. The headline basic rate is still 20% - thereby keeping the election promises of not raising the basic rate of income tax – but this only applies on earnings from £13,850 to £24,000. Importantly this is the rate at which basic rate tax is given on pension contributions. So, good news in that everyone will still get 20% relief at source (RAS) regardless of where they live in the UK.

Next comes the new intermediate rate of 21% for earnings between £24,000 and £44,273, so many current basic rate tax payers will see themselves paying at least some tax at this rate. We then finish off with a higher rate of 41% on income between £44,273 and £150,000, and a top rate of 46% on anything above this (with the reduction in personal allowance kicking in at £100,000 as now).

So what does this all mean for pensions?

Yes, relief at source will still be 20% for all (phew - things could have got really messy, and still may in years to come). It doesn’t look likely that an attempt will be made to get back the “extra” 1% relief if only the 19% starter rate had been paid. The offset for this is, of course, how many of the 21% tax payers, who otherwise may not complete a self-assessment, are going to bother to claim back that extra 1%?

It’s also worth noting that the system HMRC have put in place to notify pension scheme administrators of an individual’s status as either a Scottish resident, or “rest of UK” (rUK), is only an annual update. Files are sent in January for the following tax year, and a look up service will be available for when new members join. However, if a member crosses the border during the course of the year and notifies their provider of their new address, the provider cannot change their residency status.

For RAS purposes you’re either Scottish or rUK for the whole year. This might not be so much of an issue now when the basic rates are aligned, but if that position changes then it will lead to too much or too little relief being given, which can only be rectified at tax year end.

Unlike RAS, PAYE works in real time. So someone who lives in England and decides to move to Scotland mid tax year will find they are rUK for RAS purposes until tax year end but their income (which could include pension income) will be taxed as Scottish immediately.

Lisa Webster is technical resources consultant at AJ Bell