Proposed changes to Scottish income tax bands could see savers receiving too little tax relief, commentators have warned.
In next week's Budget, the Scottish government is expected to stop mirroring income tax applied to taxpayers in the remainder of the UK.
A discussion paper released ahead of the Budget made a number of proposals, including one which could see six bands applied, and the basic rate different to the 20% applied to the rest of the UK.
It would become incumbent on pension providers, using the relief at source arrangement, to work out whether an ‘S' or ‘rUK' tax code should be applied to their savers and, if the wrong code is used, savers could pay incorrect tax.
For example, if the basic rate is set at 18%, but the rUK tax code is used, a saver could end up receiving too much tax relief. For a saver who wants to pay in £10,000 this would see them pay £8,200 to receive a £10,000 gross contribution.
However, if the rUK tax code is applied, they would then receive a gross contribution of £10,250 after receiving 20% tax relief. They would then have received too much tax relief, putting them over the £10,000 annual allowance taper.
AJ Bell head of technical resources Gareth James said the consequences would be confusing for savers and create additional work for providers.
"If next week's Scottish Budget confirms a rate other than 20% to be the Scottish base rate, it will have significant unintended consequences and introduce additional complexities for customers, advisers and pension providers," he said.
"If the Scottish base rate of income tax was anything other than 20%, this would result in a potentially large number of people automatically receiving too little or too much tax relief, potentially meaning they will face tax charges or have to jump through additional administration hoops to deal with the consequences."
HM Revenue and Customs (HMRC) is expected to notify providers in January if their members use an ‘S' tax code, but only for members who made contributions in the 2016/17 tax year. For those members who did not contribute in that year, or joined after it ended, providers will need to use an online look-up service which only allows one member to be checked at a time.
Aegon head of pensions Kate Smith said all pension providers will need to get ready for the potential changes.
"All pension providers have to put new processes in place to identify Scottish taxpayers regardless of whether the tax rates change," she said. "Providers have to confirm the tax status for all Scottish resident pension savers with HMRC to ensure that the correct tax relief is collected and added to their pension pots.
"It's not possible for savers to simply confirm this with their pension provider. For new savers, and for some existing savers where the tax status is not correctly recorded as a Scottish resident, it could take up to two years to receive confirmation from HMRC. In the meantime, pension providers will continue to gross up pension contributions by the rUK basic rate."
She said HMRC guidance was expected to help clarify the issue.
The Scottish government's Budget will be announced on 14 December.
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