Scottish income tax and member pension contributions
From 6 April 2018, Scottish rates of income tax are different to those applying in the rest of the UK. The personal allowance and national insurance bands are the same as for the rest of the UK. We explain what this means for member pension contributions and salary sacrifice.
Bernadette Lewis, Financial Planning Manager
Identifying Scottish taxpayers
HMRC provides Scottish resident taxpayers with a tax code starting with an ‘S’.
The personal allowance is £11,850 in 2018/19 for all UK taxpayers. It reduces by £1 for every £2 of adjusted net income over £100,000. So in 2018/19, the personal allowance reduces to nil once adjusted net income reaches £123,700.
Scottish income tax rates after available personal allowance.
|Starter rate: 19%||£0 - £2,000 (first £2,000)|
|Basic rate: 20%||£2,001 - £12,150 (next £10,150)|
|Intermediate rate: 21%||£12,151 - £31,580 (next £19,430)|
|Higher rate: 41%||£31,581 - £150,000 (next £118,420)|
|Top rate: 46%||Over £150,000|
|Scottish rates of income tax apply to earnings and other non-savings, non-dividend income.|
Employee national insurance contributions
|Earnings £8,424 to £46,350 a year||12%|
|Earnings over £46,350 a year||2%|
Higher rate taxpayers and national insurance
Scottish taxpayers start paying 41% higher rate tax once earnings reach £43,430. But national insurance contributions don’t reduce from 12% to 2% until earnings reach £46,350. In the rest of the UK, 40% higher rate tax also starts applying once earnings reach £46,350.
Member contributions – group personal pensions
Member contributions to group personal pensions are paid net of 20% basic rate tax, using the relief at source method. HMRC has confirmed that Scottish taxpayers still benefit from 20% basic rate relief at source for 2018/19. So employers continue to operate the same processes for Scottish and other taxpayers.
This means that Scottish non-taxpayers will continue to benefit from 20% tax relief automatically on member contributions – as will Scottish starter rate (19%) taxpayers.
Scottish intermediate rate (21%) taxpayers will benefit from 20% tax relief automatically. If they want to take advantage of the additional 1% tax relief on contributions that fall into this tax band, they’ll need to claim this from HMRC. They might need to complete a self-assessment tax return to do this.
Scottish higher rate (41%) and top rate (46%) taxpayers will also benefit from 20% tax relief automatically. As is already the case, they’ll need to claim the remaining tax relief they’re entitled to – up to 21% or 26% – by completing a self-assessment tax return.
Member contributions – occupational pension schemes
Most occupational pension schemes use the net pay method for tax relief on pension contributions. Where this applies, the employer deducts gross member contributions from the member’s before tax income.
This means that most members automatically benefit from the correct rate of tax relief at the point their contributions are deducted from their pay. This will apply whether a Scottish taxpayer is liable to income tax at 19%, 20%, 21%, 41% or 46%.
However, an existing disadvantage continues for low earning members, who pay no tax because their earnings are covered by the personal allowance. There’s no mechanism for them to reclaim the tax relief available to other members on pension contributions.
With salary sacrifice, instead of making member contributions, an employee agrees to reduce their salary in exchange for receiving a higher employer contribution. They get their tax relief by receiving less taxable salary. There’s also a national insurance saving for both the employer and employee.
If salary sacrifice is used with a group personal pension, starter rate taxpayers will benefit from 19% tax relief rather than the 20% they’d receive by making a relief at source member contribution. However, this small disadvantage is offset by saving 12% national insurance on the sacrificed income.
If salary sacrifice is used with an occupational pension scheme operating net pay tax relief, there’s no difference in the income tax outcomes.
It’s possible for a few Scottish taxpayers to save up to 53% in tax and national insurance by using salary sacrifice in respect of the band of earnings between £43,430 and £46,350. For example, someone who reduces their normal salary of £46,350 to £43,430 in exchange for an employer pension contribution of £2,920 would save 41% income tax plus 12% national insurance on the sacrificed £2.920. In practice, salary sacrifice is more likely to save a mix of income tax at 21% and 41% and/ or national insurance at a mix of 12% and 2%.
Salary sacrifice tools
Pension providers might not have updated salary sacrifice tools to take account of the Scottish income tax bands. If so, they won’t be able to provide automated salary sacrifice calculations for this category of employees.
For Employer use only
Information correct as at April 2018