Pension tax relief may prove to be a tricky detail arising from more powers for Scotland

27th November 2014

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It is still early days in the debate over extra powers for Scotland. But the implications of variations in income tax could be profound writes Mindful Money editor John Lappin.

The Smith Commission, reported here on the BBC gives Scotland freedom to vary income tax as it sees fit including varying the tax bands i.e. the rate at which a higher or indeed lower rate would kick in, apart from, it appears, the personal allowance.

This would suggest logically, that there is also likely to be a variation in the potential tax relief depending on those rates and bands. Though specific calculations are almost impossible before we see the proposals turned into legislation, it does hold out the possibility that Scottish pension investors could see different rates of relief applied to their pension savings. As we operate what you might call a qualified exempt, exempt, taxed system of pensions, the pension then paid out would also presumably be subject to those different tax rates either side of the English Scottish border.

That said perhaps this passage from the Commission gives pause for thought.

“There will be no restrictions on the thresholds or rates the Scottish Parliament can set. All other aspects of income tax will remain reserved to the UK Parliament, including the imposition of the annual charge to income tax, the personal allowance, the taxation of savings and dividend income, the ability to introduce and amend tax reliefs and the definition of income.”

So there will definitely be an anomaly in pension planning.

Match pension tax relief to income tax and there is an anomaly. Somehow retain a national level of reliefa, arguably reserved to Westminster in the wording above, and you also create an anomaly.

Such is the result of devolving new powers. Of course the key retirement benefit, the state pension remains reserved to the UK government, so the fundamental financial floor to pension planning remains the same. But other benefits for carers, the disabled, and older people are devolved.

The impact on means-testing may also be something to watch.

But there is going to be a lot of think about when people decide where to work, where to live, and where to retire and even, arguably, where to save.

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