PLANNING FOR YOUR RETIREMENT

Scottish tax rises could make pension savings more attractive

  • Shunil Roy-Chaudhuri, Personal Finance and Investment Writer
  • 13 March 2024
  • 8 mins reading time

Increases to income tax rates in Scotland, announced in December 2023, look set to widen the differences between rates north of the border and those elsewhere in the UK.

As things currently stand, the difference is starkest for people earning £75,000 or more. Deputy First Minister of Scotland Shona Robison announced the introduction of a 45 percent tax rate on income above this level from the 2024/25 tax year (see table below). If you’re living in the rest of the UK, you’ll currently pay a lesser rate of 40 percent.

She also announced that the income tax rate on earnings of £125,140 and above would rise from 47 percent to 48 percent. This compares with 45 percent in the rest of the UK.

The 42 percent rate payable on income of £43,663 or more in Scotland remains unchanged. As the table shows, in the rest of the UK a 20 percent rate is paid on earnings between £12,571 and £50,270.

Income tax rates: Scotland vs Rest of UK

Sources: Scottish Government, Gov.uk, 13 March 2024

Broadly speaking, if you live in Scotland and earn more than around £30,000 a year, you’ll pay more income tax than if you were living south of the border. But if you’re earning less than around £25,000 a year you’ll pay less income tax in Scotland than elsewhere in the UK. Between £25,000 and £30,000 the differences are marginal.

But the differences become more marked if you live in Scotland and earn more than £44,000. And they become starker still if you earn more than £75,000. The chart below shows how the differences in tax liabilities between Scotland and the rest of the UK have changed since 2016/17 for three different income levels.

Shortfall in take-home pay between Scotland and the rest of the UK

Source: EY

Higher earners in Scotland face greater tax liabilities than people elsewhere in the UK. But this means they could gain a greater tax benefit from saving into a pension, as pension savings are deducted from income for tax purposes.

Even so, there’s no simple answer as to whether Scottish higher earners should in fact put more into their pensions. This would depend on their overall financial circumstances and their wider financial planning needs. If you are affected, then you may want to speak to a financial adviser.

When are you considered to ‘live’ in Scotland?

You can find the rules on who is liable for Scottish income tax in the ‘Income Tax in Scotland’ page on the Gov.uk website. In essence, you are liable at the Scottish rates if you live in Scotland for a longer period than anywhere else in the UK during a tax year. You are also liable if your main home is considered to be in Scotland, irrespective of whether you own it, rent it or live in it for free. Your main home may be the home where you actually spend less time if it’s where:

  • you keep most of your possessions

  • your family lives, if you’re married or in a civil partnership

  • you’re registered for things like your bank account, GP or car insurance

  • you’re a member of clubs or societies.

At Schroders Personal Wealth (SPW) one of our key principles is to have regular reviews with a financial adviser. This can help ensure your financial arrangements remain in step with changes to the tax regime, both north and south of the border.

Important information

This article is for information purposes only. It is not intended as investment advice.

Fees and charges apply.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.

Any views expressed are our in-house views as at the time of publishing. This content may not be used, copied, quoted circulated or otherwise disclosed (in whole or in part) without prior written consent.

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