How greater Scottish devolution could affect your scheme

The prospect of other expensive consequences too, such as a Scottish Pensions Regulator, a Scottish Nest, and a possible Scottish Pension Protection Fund – not to mention currency differences – combined to spook the industry.

It didn’t happen. For now, at least, Scottish independence is a dead grouse. But are there any other reasons why pension providers should be watching developments in Scottish law?

At the moment there are few substantial differences between the law in England and Wales and the law in Scotland that affect pensions outside the public sector. 

Bankruptcy and divorce are the main ones but impact only a small minority of individual members. That situation is manageable – but about to change. The buzzword is devolution. What powers are already on the statute book, and what might happen in the future?

The big issue is tax-setting powers. The Scotland Act 2012 already gives the Scottish parliament the power to set a separate rate of income tax for Scottish taxpayers, with effect from April 6 2016. This is not a devolved tax. It forms part of the UK tax system and will be administered by HM Revenue & Customs.

The basic, higher and additional rates of income tax payable by Scottish taxpayers will be reduced by 10p. However, they will be liable to an additional rate, set by the Scottish parliament each year for the following tax year, applied to each of the tax bands. Personal allowances will not be affected.

The new Scottish rate of income tax will replace the Scottish variable rate. This allowed the Scottish government to vary the basic rate of income tax by plus or minus 3p, but was never used and lapsed in 2007.

System changes may be needed and this is what is really worrying the industry, as politicians tend to seriously underestimate the time required

Scottish taxpayers are broadly defined under the act as UK residents whose only or main UK place of residence is in Scotland. HMRC will need to identify those who are Scottish taxpayers who will, if they are on PAYE, be given a Scottish tax code. 

Pension scheme administrators will need help from HMRC to know which of their members are Scottish taxpayers, in order for tax relief via ‘relief at source’ to be paid at Scottish rates.  

Tax due on pension payments could be affected, as well as tax relief on pension contributions. System changes may be needed and this is what is really worrying the industry, as politicians tend to seriously underestimate the time required.

Schemes should be ready to make RAS claims at the Scottish basic rate from April 2018. In the meantime, the government has agreed that from April 2016 pension scheme administrators can continue to claim RAS at the UK basic rate of tax for all members. 

HMRC will make any necessary adjustment to tax relief direct with members that it identifies as Scottish taxpayers. This will be done either via self-assessment or PAYE coding.

Besides tax rates and thresholds, welfare benefits seem likely to be high on the agenda. The amount of the basic state pension and the age at which it becomes payable could both be different for Scottish taxpayers.  

At a time when the rate of change being forced upon the industry seems almost unprecedented, many are shouting “enough!”. Clearly, though, Scots have the bit between their teeth and will be keen to hold UK politicians to their promises about future devolution. In the run-up to the vote, all three main UK parties made significant pledges.

Voices were heard demanding devolution of tax-setting powers to England, Wales and Northern Ireland too. Even the prime minister agreed that the people of each nation should have a bigger say over their own affairs. The genie is out of the bottle.

Ian Neale is a director at Aries Pension & Insurance Systems