Act to gain your tax relief entitlement for pensions

Mike McAnulty of Central Investment highlights some implications of new Scots income bands

Changes introduced in Scotland on April 6 mean taxpayers north of the border are now spread across five income bands.

The two new tax bands, starter and intermediate were announced by Finance Secretary Derek Mackay in the 2018-19 Scottish Budget.

Tax rates for earnings from employment, or self-employed trade and property income, range between 19% and 46%.

Scottish taxpayers are entitled to the same personal allowance as people elsewhere in the UK, which has increased by £350 to £11,850 for 2018-19.

The new starter rate, together with the increase in personal allowance, will guarantee that those earning less than £33,000 in 201819, which is 70% of all taxpayers, will pay less tax than they did during 2017-18. Those earning between £24,001 and £43,430 are now part of the new intermediate rate, which sees them paying an extra 1p in taxes for every pound earned. The changes have a knock-on effect for pension schemes which apply tax relief after members have paid

“It may not sound like a lot but could add up to thousands”

income tax, known as “relief at source”. While we at Central Investment believe HM Revenue and Customs (HMRC) has taken the most practical and fair approach, there are situations where people will need to take action to order to gain their full pension tax relief entitlement.

Relief is currently applied to basic rate taxpayers at 20%, so making an £80 contribution to your pension becomes £100.

Those on the new 19% starter rate are paying less tax than before, but they will still benefit from 20% tax relief. People still on the basic tax rate of 20% will see no difference. Intermediate rate taxpayers will lose out on 1% through the new bandings. However, they will be able to claim tax relief to address this.

Higher-rate and additional-rate taxpayers who currently receive pension relief of 20% will also be able to claim the additional 1%.

For example, if you earn £25,000 a year and pay 5%, or £1,250, into your pension pot each year, the scheme would receive £312.50 direct from HMRC, giving a total pension contribution of £1,532.50.

You can then claim an additional 1% tax relief of £15.63. This may not sound like a lot but over a substantial period of time it could add up to thousands of pounds.

A financial adviser will help you to reap the benefit of your full entitlement to pensions tax relief.

PENSION POTS OF MONEY: Scottish taxpayers’ five income bands have a knock-on effect on pension schemes, says Mike McAnulty