Scots face pension and savings turmoil

Scots face pension and savings turmoil

Scots face having their savings accounts and pensions thrown into turmoil by the Government’s plans to allow MSPs to set their own income tax, senior finance experts have warned.

By Simon Johnson, Scottish Political Editor 6:54PM GMT 25 Jan 2011

The Institute of Chartered Accountants of Scotland (ICAS) said a hugely complicated system must set up to ensure savers and pensioners are charged the right amount of tax on their investments.

Currently, financial service companies do not have enough detail about many of their policyholders to determine whether they spend enough time north of the Border to be deemed a Scottish taxpayer.

The institute warned the administrative costs of HM Revenue and Customs (HMRC) collecting this information and giving it to pension and savings providers may be passed on to Holyrood.

Alternatively, the companies themselves may bear the costs and pass them onto their policyholders in the form of increased administration charges.

The changes, included in the Scotland Bill, also threaten to cause huge confusion in the benefits system as many are means-tested based on a household’s post-tax income.

If Scotland and England have different income tax rates, people with the same level of take-home pay either side of the Border will not receive the same level of benefits.

The Scotland Bill aims to make Holyrood more responsible for the money it spends by transferring a range of limited tax powers, including income tax.

But the Daily Telegraph has reported warnings from ICAS the changes could lead to a huge increase in tax evasion and a bill “significantly” in excess of £150 million to draw up a register of Scottish taxpayers.

Two of the institute’s senior directors are giving evidence to a Holyrood committee investigating the legislation, and are expected to warn of a series of “anomalies” that will create huge problems.

Pensioners and savers pay income tax on the money they receive from their investments and an ICAS submission to the committee warned the Scotland Bill’s changes will cause firms providing these products “particular problems”.

“For many taxpayers, they will not have sufficient detail to determine the residence of the holder of investments,” the institute said.

“It will be necessary to implement procedures to identify whether the Scottish or rest of the UK rate needs to be applied for each investment.”

This problem will also affect the tax relief workers receive on pension contributions, which is also based on income tax levels, the accountancy experts said.

The administrative cost could either be passed onto Scottish taxpayers “in the form of charges” or left to financial service companies. However, the latter option would have “implications for the costs borne on investments such as pensions”.

ICAS also warned that MSPs raising income tax above the English level may mean employers being forced to pay the difference to attract workers to Scotland.

The change will be particularly complex for Scots on low incomes, especially those who receive benefits such as pension credits, housing benefit and income support.

These are means tested based on post-tax income. If MSPs raise taxes, then the amount they receive will go up. For tax credits, people earning the same amount either side of the Border would be handed different amounts.

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