Following the news that a new income tax band is being created in Scotland, Jon Greer, head of retirement policy at Quilter, explains what this will mean for tax relief on pensions for those savers affected. He says:
The recent changes to Scotland’s income tax structure, specifically with the introduction of a new 45% tax band for individuals earning between £75,000 and £125,140, have wider implications beyond immediate tax liabilities. One key area impacted by these changes is pension contributions, especially for higher earners.
The increase in the income tax rate for higher earners may lead to a reconsideration of their pension contribution strategies. Since pension contributions can be used as a means to reduce taxable income, individuals in the new 45% bracket might see an increased incentive to contribute more to their pensions, effectively reducing their taxable income and gaining more from the tax relief available on pension contributions.
However, this strategy’s efficacy depends on several factors, including individual financial situations and the specifics of their pension schemes. Clarity on this needs to be given to be swiftly to ensure they can plan effectively. For those in pension schemes operating under the ‘relief at source’ method, where tax relief is claimed back from HMRC, there could be complexities in claiming the full relief owed, especially for those unfamiliar with detailed tax filings. This could mean that some miss out on increasing their pension contributions while reducing their taxable income.
The changes also highlight the importance of financial planning and getting advice, especially for those who might not be accustomed to engaging with the complexities of tax returns and pension contributions as they find themselves paying more tax than they were used to.
