Income tax changes in Scotland predicted to cause chaos

Income tax changes in Scotland predicted to cause chaos

Proposed changes to the income tax bands in Scotland could cause disruption and chaos in the pension system potentially hitting hundreds of thousands of savers, a provider has warned.

The Scottish government is considering whether it should change the thresholds of income tax in order to raise more money for public services.

In early November it released a discussion paper outlining four alternative methods for collecting the tax, which would make the tax bands different to the UK system.

Among the suggestions was to have up to six income tax bands and to potentially change the basic rate of tax collected in Scotland.

An announcement is expected to be made at the country’s next Budget on 14 December. 

AJ Bell warned any such change could cause major disruption as people could be put in the wrong regional tax codes affecting things like pension tax breaks and the annual allowance.

Gareth James, head of technical resources at AJ Bell, said: “If the Scottish basic rate of income tax was anything other than 20%, this would result in a potentially large number of people automatically receiving too little or too much pension tax relief on their contributions, potentially meaning they will face tax charges or having to jump through additional administration hoops to deal with the consequences.

“This will be confusing for consumers and create additional work for financial advisers and pension providers.”

There are currently 770,000 taxpayers in Scotland contributing to pension schemes that could potentially be affected by this, AJ Bell said.

The way the switch-over would work is where pension members made contributions in the 2016/17 tax year, HMRC will notify pension providers in January if those members are on an “S” tax code for Scottish taxpayes or an "rUK" tax code used for the rest of the UK.  

Providers will then be able to claim basic rate tax relief on contributions and pay tax on income at the appropriate rates from the 2018/19 tax year.

In the absence of an “S” tax code, a provider must use the “rUK” code.

For members who did not contribute in 2016/17, there will be an online HMRC look-up service that providers can use to obtain the correct tax code. 

However this currently only allows providers to check the code of one member at a time, AJ Bell said.

The provider warned there was “a real possibility” some Scottish taxpayers will end up being treated as UK taxpayers. 

This could result in them receiving the wrong amount of pension tax relief and potentially exceeding the annual allowance, it said.

Principal of Forty Two Wealth Management, Alan Dick, said: “Having a different tax system from the rest of the UK creates all sorts of problems, it is a potential nightmare.”

He warned there could be a danger people are being put in the wrong tax codes because they work elsewhere in the UK but live in Scotland or they work for an English company but live in Scotland.