19th September 2014
Increased powers for Scotland to set its own tax rates could mean it becomes a more attractive place to retire too as pensioners pay less of their savings to the taxman.
With the success of the ‘no’ vote, prime minister David Cameron will now have to make good on his promises of increased devolution of powers for Scotland to give it greater control over its taxes.
If Scotland uses these new powers to reduce income tax below the rate set in the rest of the UK, then pensioners could be better off retiring north of the border, according to pensions experts Towers Watson.
Scotland already has powers to vary income tax by up to 10% from April 2016, under plans set out in the Scotland Act 2012.
In a paper called Still Together: what greater devolution for Scotland will mean for the tax treatment of Scottish pensions, Towers Watson said: ‘If tax rate and bands diverge in Scotland thee may be scope for further tax planning for individuals intending to retire to or from Scotland.’
For instance a person who lives, works and makes pension contributions in England would be liable to tax relief on pension contributions relative to the income tax they pay – 20% for basic rate and 40% for higher rate taxpayers.
However, if Scotland introduces a lower income tax rate and the pensioner takes their pension income in Scotland they would pay less tax on the way out than the tax relief they received in the way in.
‘Although Scotland will remain part of the UK, changes to income tax promised after the referendum vote will have interesting consequences for pension plans and their sponsors,’ said Towers Watson. ‘In particular, the operation of tax reliefs will affect personal pension plans and may lead to changes to other tax rates applied to pension plans.’