Explanatory note

This Order amends certain provisions of the Income Tax Acts and the linked Registered Pensions Schemes (Relief at Source) Regulations 2005 (S.I. 2005/3448) (“the RAS regulations”). The amendments are made in consequence of the power of the Scottish Parliament to set a Scottish rate of income tax provided for in Part 4A of the Scotland Act 1998 (c. 46). The power is expected to be exercisable for the tax year 2016-2017 and subsequent tax years.

The Scottish rate of income tax is used to calculate the Scottish basic, higher and additional rates of income tax which apply to the non-savings income of a Scottish taxpayer. This Order makes amendments to take account of the potential for a difference between the Scottish basic, higher and additional rates on the one hand and the basic, higher and additional rates of income tax on the other.

Articles 3 to 6 deal with income tax relief at source for contributions to a registered pension in Part 4, Chapter 4 of the Finance Act 2004 (c. 12) (“FA 2004”). An individual is given relief on his contribution to a scheme by way of the scheme administrator adding a sum equal to income tax on the contribution at the basic rate which the scheme administrator claims from Her Majesty’s Revenue and Customs (“HMRC”). Section 192 of FA 2004 is amended to provide that the scheme administrator must use the Scottish basic rate to arrive at the amount to be added to a contribution where so notified by HMRC (article 3(2) and (3)).

Articles 4 and 5 insert new sections 192A and 192B into FA 2004 so that an individual who is a Scottish taxpayer for the tax year in which a contribution is made receives relief at the Scottish basic rate even if he has received relief at source under amended section 192 at the basic rate, and so that an individual who is not a Scottish taxpayer receives relief at the basic rate even if he has received relief at source at the Scottish basic rate. New section 192A of FA 2004 provides for additional relief by way of a tax reduction where too little relief has been given under section 192 and new section 192B allows for excessive relief to be clawed back using the additional tax collection mechanism in section 30 of the Income Tax Act 2007 (c. 3) (“ITA”). Section 192 is also amended to provide that where a Scottish taxpayer’s income is chargeable at the Scottish higher rate or Scottish additional rate, relief on the contribution is given at those rates (article 3(4)).

Article 7 makes amendments to sections 227 and 237B of FA 2004 which deal with the annual allowance charge applied where an individual’s pension input amount exceeds the annual allowance for a tax year, to provide that, in the case of a Scottish taxpayer, the Scottish basic, higher and additional rates apply in calculating the charge.

Section 539 of the Income Tax (Trading and Other Income) Act 2005 (c. 5) (“ITTOIA”) is amended to take account of income charged at the Scottish basic, higher and additional rates in calculating a tax reduction given if a deficiency arises when an individual’s life insurance policy (or similar policy or contract) comes to an end.

Section 669 of ITTOIA, which provides for a reduction in the residuary income of a deceased’s estate in certain circumstances, is amended so that it takes into account income charged at the Scottish higher rate or the Scottish additional rate as well as income charged at the higher rate or additional rate. It also provides for the amount of extra liability to be calculated by reference to the Scottish basic rate instead of the basic rate in the case of a Scottish taxpayer. Section 685A of ITTOIA, which provides for a tax credit where a person other than the settlor receives an annual payment from a settlor-interested trust, is amended: if the person is a Scottish taxpayer, the credit is calculated at the Scottish additional rate instead of the additional rate.

Article 10 amends section 7 of the Finance (No. 2) Act 2005 (c. 22), which imposes a charge to income tax where a person becomes entitled to a social security pension lump sum. It is amended to provide that in the case of a Scottish taxpayer the Scottish basic, higher and additional rates apply in calculating the amount of the charge instead of the basic, higher and additional rates.

Article 11(2) amends section 31 of ITA to include in the total income calculation income from which deduction is made at the Scottish basic rate. The provisions in ITA on the transferable tax allowance for married couples are amended to provide that an individual liable to tax at the Scottish basic rate is eligible for the tax reduction or to make an election to reduce his personal allowance. The amendments apply the Scottish basic rate in calculating the amount of the tax reduction in the case of a Scottish taxpayer (article 11(3)).

Sections 58, 414 and 415 of ITA dealing with relief for gifts to charity provide for the relief to be given at the Scottish basic rate instead of the basic rate if the individual is a Scottish taxpayer (article 11(5) to (7)).

A Tax Information and Impact Note covering this instrument was published on 14th March 2014 alongside Budget and is available at http://www.gov.uk/government/collections/tax-information-and-impact-notes-tiins. It remains an accurate summary of the impacts that apply to this instrument.