The latest from our Scottish consultancy team, based in The Capital Building on Edinburgh's St Andrew Square
Latest Scottish Budget sees no major changes to pensions, but taxation issues remain
There were never going to be any major ramifications on the pensions front via the Scottish Government Budget, the most recent of which happened on 28 January. Whilst the Scottish Finance Minister, Kate Forbes, has a range of fiscal levers at her disposal, pensions policy is not one of them, being reserved at Westminster. On the other hand, income tax is of course.
The Scottish Government is able to set income tax rates and bands, and as we all know established a progressive 5 band to replace the UK’s 3 band system from 2018/19 onwards. The proposed income bands and tax rates for 2021/22, are shown in the table below:
Scottish Income Tax Policy Proposals 2021-22
|Over £12,570 - £14,667||19%|
|Over £14,667 - £25,296||20%|
|Over £25,296 - £43,662||
|Over £43,662 - £150,000*||41%|
* Assumes individuals are in receipt of the Standard UK Personal Allowance
** The Top Rate remains at 2020-21 level. Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000
One of the major incentives to save into a pension is the tax relief available at your highest marginal rate of income tax, so it’s worth noting that there was no change to tax rates and a simple CPI uplift to the band thresholds as shown which means, for now, no change to the tax relief available.
This means, for example, for now the use of salary exchange by employers with Scottish taxpayers continues to be an effective means of ensuring the full rate of tax relief is received by each pension scheme member.
Where contributions are deducted on a Relief At Source (RAS) tax relief basis, (normally under a contract-based scheme, e.g. a group personal pension or stakeholder scheme) it’s worth reminding those employees that pay more than basic rate tax that they need to take action to claim the additional tax relief they are entitled to.
So, all eyes now turn to the UK Budget on 3 March, and the unprecedented economic issues being grappled with by Government as the country battles its way through the COVID-19 pandemic.
In recent years, there has been much speculation on limits to tax relief and so far that has been tackled for ‘high income individuals’ by incrementally reducing their Annual Allowance to a minimum of £4,000 per tax year from the standard £40,000. Tax relief currently costs the UK Government around £37bn a year so is a constant focus of attention from the Treasury.
However, this time round what may the Chancellor Rishi Sunak deliver in the 2021 Budget?
He may now grasp some nettles previously untouched:
Limit tax relief for everyone to a flat rate which could now be purely the Basic Rate i.e. 20% regardless of earnings
This would assist with another potential policy change which would be to move all schemes onto a Relief At Source (RAS) tax relief basis. The member pays the net amount into the plan from after tax earnings, and HMRC top that up to the full contribution.
Such a policy change would be aimed primarily at low earners who lose out on tax relief using the other main method where the gross contribution is deducted from gross taxable earnings – great if you pay tax, but for low earners paying no tax then no relief is given.
Increase the basic rate of income tax and associated pensions tax relief. The Conservative’s manifesto did pledge not to increase the three main taxes: income tax, national insurance or VAT, but that was in 2019 before any hint of the pandemic and the Chancellor could argue that the unprecedented circumstances we find ourselves in now and our national debt of £2.13 trillion (99.4% of GDP) are grounds for a change of policy.
The entire UK Budget could be full of surprises. Hopefully on the pensions front, not as unforeseen as the 2014 Budget introducing Pension Freedoms related to the decumulation phase from age 55, that is the drawing of benefits.
However, of all the years when there may potentially be far reaching pension related announcements, the 2021 COVID-19 driven Budget could be one of them, and perhaps this time the focus will shift to the accumulation phase.
There is over £6 trillion private pension wealth in the UK (source: ONS December 2019), in some of the most tax sheltered savings wrappers – it may be pretty hard for the Chancellor to ignore them at times like these.
If you need help understanding what these changes could mean for your business and pension scheme, or if you simply want to get ahead of the curve, get in touch: email@example.com.