5 March 2018

Scottish taxpayers – gift aid and pension contributions from 2018/19

The Scottish Parliament passed the 2018/19 tax rates and tax bands on 20th February 2018. What will this mean for gift aid and pension contributions?

The Scottish Parliament passed the 2018/19 tax rates and tax bands on 20th February 2018.  These were not quite as announced by the Finance Minister Derek Mackay in his Scottish Budget in December 2017 and included a reduction to the income level at which the higher rate of tax is paid in Scotland.

From 6 April 2018 the non-savings, non-dividend income of Scottish taxpayers will be subject to the following rates of tax:

Over £11,850 to £13,850 19%
£13,850 to £24,000 20%
£24,000 to £43,430 21%
£43,430 to £150,000 41%
Over £150,000 46%

As with taxpayers in the rest of the UK, the personal allowance of £11,850 continues to be withdrawn at the rate of £1 for every £2 of income over £100,000.  Savings and dividend income continue to be taxed according to UK rates.

This therefore means some changes to the tax position of an individual who makes contributions to charity under the gift aid scheme and personal pension contributions.

GIft aid

A payment to charity under the gift aid scheme is regarded as being made net of the UK basic rate of tax, which has remained at 20% for a number of years.  An individual who gifts £100 to charity is therefore treated as making a gross payment of £125, and can claim tax relief on the gross amount at their marginal rate of tax.  For a 40% taxpayer, a gross contribution of £125 would result in tax relief of £25 through their self-assessment return.

Under the new Scottish rates of tax, that rate of relief will now increase for higher rate and top rate taxpayers.  A 41% taxpayer will now be able to claim tax relief of £26.25 on this level of donation, whilst a 46% taxpayer will be able to claim relief of £32.50.

Some Scottish taxpayers will now be paying tax at the lower rate of 19%.  HM Treasury has confirmed that charities should continue to recover tax at the rate of 25p for every £1 donated, so it will be irrelevant to the charity where the donor is based.  The tax rate of the donor is also irrelevant.  It does however remain a key part of the gift aid scheme that the donor is able to complete the declaration to show that they have paid sufficient income tax or capital gains tax to enable the charity to recover the additional sum.  If a taxpayer is no longer paying sufficient tax, they will be unable to complete the gift aid declaration.

Pension contributions

There are two ways in which individuals can receive tax relief on their pension contributions.  For those in “net pay” schemes, tax relief is given before income tax is applied to earnings.  Pension tax relief on these contributions will continue to be given at the individual’s marginal rate and from 6 April 2018 this will include the newly increased Scottish rates.

For those not in net pay schemes, pension contributions are treated as being made net of basic rate tax at 20%.  This will continue from 6 April 2018 for schemes whose members are Scottish taxpayers.  For those who are paying tax at no more than the Scottish starter rate of 19% or who pay no tax, the current tax rules will continue to apply.  This means that the scheme administrator will continue to claim relief at 20% in respect of these contributions, and HMRC will not recover the difference between the Scottish starter rate and Scottish basic rate.

For Scottish taxpayers who are paying tax at 41% or 46%, additional relief will be available in respect of their pension contributions.  For many this will be claimed through their self-assessment tax returns as normal.  However taxpayers who find themselves paying tax at the intermediate rate of 21% will similarly be able to claim the extra 1% tax relief.  HMRC have indicated that if these taxpayers are not completing self-assessment returns, they should contact HMRC to advise them that they are within this bracket, and this will enable the additional tax relief to be included in a PAYE code for 2018/19.

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