What you need to know about the proposed changes to income tax in Scotland

What you need to know about the proposed changes to income tax in Scotland.

All tax mentioned is subject to change and depends on individual circumstances.

As you probably already know, the Scottish government recently announced its planned changes to the 2018/19 Scottish income tax rates.

These changes are yet to be put in place but are expected to raise £164 million for public services from those earning the least paying less and those earning the most paying more.

Whatever stage you are at in life, the announcement may have left you feeling optimistic or sceptical.

One thing is for sure, the sooner we know exactly what is happening, the better.  

Let’s face it, tax changes are not exactly the most glamorous and interesting thing to get to grips with, but it’s important to understand how they could affect your finances, including your pension.

What’s changing?

Before we see how these proposed changes could affect you, let’s take a look at the basics:

The most significant change is the move to a five-band tax system:

The new tax band of 21p for those earning more than £24,000 has been introduced along with a starter rate of 19p. The higher rate of tax will be increased from 40p to 41p and the top rate from 45p to 46p.

Finance Secretary, Derek Mackay said that the move to a five-band income tax system will mean a majority of taxpayers (55%) in Scotland will pay marginally less in 2018/19 than they would in the rest of the UK, although the higher rate taxpayer would pay more.

All tax mentioned is subject to change and depends on individual circumstances.

However, many are concerned that changes to the rates could cause issues with pension tax relief calculations.

And that could mean that there will be a huge amount of people being forced into filling in a tax return.

What will happen if I want to take money from my pension?

Releasing pension benefits early doesn’t necessarily make sense for everyone and could reduce your income in retirement which is why it pays to take professional, independent advice. Pension release is only suitable for a limited number of people and circumstances and shouldn’t be seen as an easy way to raise finance.

If you’re 55 or over, you still could be able to take out 25% of your pension tax-free. As always, any withdrawals from the remainder of your pot will be taxed.

After your tax-free cash is gone, your pension will be seen as an income. So, you will need to add any pension withdrawals that to other income you may have and you’ll then be taxed accordingly, based on the table shown above.

Under the proposed new tax bands, some people will pay slightly less income tax and some will pay slightly more. For example, if you take £13,500 a year from your pension with no other income you pay £86 less on tax a year.

If you take £40,000 a year from your pension with no other income you pay £70 more on tax a year.

What will happen if I’m contributing to my pension?

When you put money in your pension, you will receive tax relief depending on what band and what the current rate is. To put it simply, the government gives back the on the income tax already paid on the money.

Across the UK, tax relief is paid on pension savings in line with an individual’s tax bracket. That means it costs a 20% taxpayer £80 to save £100 into a pension and a 40% taxpayer £60.

Higher and additional rate taxpayers will need to claim back the tax relief through HMRC using self-assessment.

In Scotland, a higher-rate, 41% taxpayer would therefore only have to pay £59 to make the same £100 pension contribution. Likewise, a 19% taxpayer would have to pay £81.

There is a worry that those who are new to contributing to a pension and do not have a tax code, could receive the wrong tax relief; either too much or too little. The HMRC usually only sends taxpayer data to providers annually, so anyone paying the wrong tax could also face a long wait for the issue be settled.

Attempting to settle that concern, a Scottish government spokesperson said: “HMRC have made clear they will ensure the mechanisms for providing pensions tax relief to continue to work effectively for Scottish pension savers.”

Have these changes already been made?

No, not yet.

The plans were announced just before Christmas, and the Scottish Parliament will have to debate the draft budget with a first chamber vote by the end of January, and a final vote in mid-February. As a minority government, the SNP will need the support of at least one other party to back up its proposals, which is looking likely to be the Greens. The Finance Secretary will also be in talks with other parties.

What’s next?

The proposals are not yet set in stone, so it’s currently a case of wait and see.

If they are passed as law, it’s best to talk with your financial adviser or pension provider to make sure you fully understand how the changes will affect your pension.

We are always here to help and are happy to have a chat. 

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Scottish income taxpayers: what you need to know

What the 2018/19 proposals could mean for you...


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Important Information

1BBC News (Online) – Scottish income tax changes unveiled, 14 December 2017.

²BBC News (Online) – Scottish income tax changes unveiled, 14 December 2017.

³BBC News (online) – Scotland’s budget: what does it mean for me?, 14 December 2017.

⁴ UK tax calculator, Sid Henriksen, 29 December 2017

⁵The Telegraph – Scottish income tax rise for those earning £33,000, 14 December 2017.

⁶The Scotsman – Tax changes ‘will penalise Scots wanting to cash in their pension.’ 17 December 2017

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section here.

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