The changes mean that those earning less than £33,000 will pay less income tax whilst those earning more will be contributing more.
Sean Cockburn, private client senior manager at Mazars in Edinburgh, said: “Following the issues encountered by HMRC in implementing the dividend allowance and personal savings allowance, there are questions about how their systems will handle collecting 5 Scottish rates of income tax in addition to the existing rates which continue to apply to savings and dividend income received by Scottish taxpayers.
“It might be that the complexities involved in introducing new tax bands would outweigh the benefits to the taxpayer – for example, the tax reduction for those who benefit from the 19% band will only be £20 per year – not quite enough to cover the Christmas turkey.”
Jon Greer, head of retirement policy at Old Mutual Wealth said the proposals would increase pension opt-outs and hinder the success of auto-enrolment.
“This show of Scottish power, while somewhat inevitable, exacerbates an already hideously complex tax system. It will cause short-term havoc as Scottish tax payers may end up receiving the wrong amount of pension tax relief. Worse still, if clarification on how it impacts pension tax relief is not given swiftly, it may hurt the success of auto-enrolment.
“The introduction of two new tax bands will mean that Scottish residents could be entitled to more or less than the basic rate tax relief on some or all of their personal pension contribution. However, it’s uncertain how they will either be charged or will be able to claim this relief. This ultimately rests with HMRC.”
Worst case scenario
According to Greer those who fall in the 19% tax band, who are the most financially vulnerable, could end up receiving a letter from the tax man demanding more money because they’ve received too much tax relief.
“The prospect of such an unexpected demand could lead individuals to view their pension contribution in a negative light and this is the last thing that a Government would wish given pension savings rates are so low, ” said Greer. “We hope that they consider the practicalities of this change carefully.”
Higher rate tax payers
Currently, higher rate tax payers have to complete a self-assessment to claim their extra relief. However, this will not work for the new intermediate 21% tax band payer. HMRC will need to introduce a simple process and they will need to do so quickly, warned Greer.
Gareth James, head of technical services at AJ Bell, agreed tax affairs are about to become more complex
“The biggest impact will potentially be for those in the 21% band, where we’d expect people to have the option of reclaiming the extra 1%, just like those in the higher and top rate bands. The Scottish Government says there are 898,000 people in the band so it potentially affects a significant number of people.
“The big question is, how difficult will this be and will people bother? Someone earning £30,000 and contributing 10% of their salary would pay in £2,400, get tax relief at source of £600 and can then reclaim an extra £30.”
James notes however £30 saved in a pension could be worth £3,805 by 2057…
Of course now the SNP Governemnt needs the support of at least one other party to pass the legislation.