Scotland’s tax changes – could upping your pension contributions help soften the blow?

If you’re classed as a higher earner in Scotland, the latest proposed income tax changes might have you searching for ways to reduce your tax liabilities. Increasing your pension payments to gain tax relief could be one option to consider.... Read more

Scottish young professional, smiling whilst having a coffee with colleague

Blog24th Jan 2024

By Lisa Tait

If you’re classed as a higher earner in Scotland, the latest proposed income tax changes might have you searching for ways to reduce your tax liabilities. Increasing your pension payments to gain tax relief could be one option to consider.

What’s happening with Scottish tax rates?

Plans outlined before Christmas included a new advanced tax band from April for 2024/25. Covering those earning between £75,001 and £125,140, this is well above the median income level. Even so, many falling into this bracket might have considered themselves well paid, but still on a relatively ‘normal’ salary.

Assuming they’re approved, the changes, which also include a rise in how much the very top band pays, mean Scotland’s tax rules now look more complex than ever. There will be six separate tax bands – the rest of the UK has just three.

It’s even more complicated when you factor in that other taxes, including national insurance, capital gains tax and dividend income, are decided at a UK level.

The brighter side – tax relief

But looking only at tax liabilities is focusing on just one side of the coin.

Yes, the latest budget’s aim is for those with “the broadest shoulders” (that is, the highest earners) to bear the brunt of taxation. But in general, tax policy is based around the idea that higher-than-necessary tax rates are tempered by tax breaks.

Tax breaks help encourage particular behaviour, or help grow certain areas of the economy, for example, promoting more donations to charity, or providing more aid for entrepreneurs.

Think of it like a reward scheme, akin to Tesco’s Clubcard. Tesco isn’t the cheapest supermarket by a long stretch. But the promise of savings on the weekly shop and other loyalty bonuses makes the consumer feel more comfortable with the higher costs and less likely to look elsewhere.

Tax relief is your loyalty bonus. There’s much you can do to reduce your tax liabilities at a personal level, simply by arranging your finances in a more efficient manner. Importantly, this isn’t avoiding some civic duty or evading tax. It’s within the rules – and the spirit of the rules – of what the government is trying to achieve.

Tax relief by paying into your pension

This brings us onto one form of tax relief that can sometimes go overlooked – pension contributions.

Previous research from PensionBee found that between 2016/17 and 2020/21, UK high earners left £1.3 billion pension tax relief unclaimed. This is like going to Tesco every week, but never claiming back your Clubcard points (but on a much larger scale).

How does pension tax relief work? You can get relief on private pensions worth up to 100% of your annual earnings – this is either added automatically at source, or claimed back via self-assessment.

Tax relief from your pension contributions is effectively exchanging jam today for jam tomorrow. Depending on what type of pension you have, you can increase your contributions through your employer – via a salary-sacrifice scheme – or by making additional voluntary payments yourself. While more of your earnings are unavailable now, the trade-off is either reducing your tax bill in the short term or benefiting from an additional government contribution of tax relief into your pension pot.

When considering increasing your contributions, the important thing to remember is what kind of tax rates will apply in the future. Ideally you want to have a higher rate of tax relief on entry than you would expect to pay when withdrawing your pensions later. If there’s no premium there, there’s not much real benefit in upping your contributions.

By increasing income tax rates for the higher brackets, the Scottish Government is also increasing the potential tax relief on entry. This could make additional contributions more attractive.


But is it right for you?

Whether you should attempt to gain tax relief in this way, comes down to a few variables, including how able you are to tie up money now and the specific rates of tax you’re likely to see on entry and exit to your pension. There can be other complications too, for example, if you’re getting tax relief ‘at source’ (where the tax is claimed back directly from HMRC) getting back the full relief can sometimes prove tricky, particularly if you’re unfamiliar with detailed tax filings.

And remember, pension contributions aren’t the only route to consider. Another notable lever we often speak to our clients about is managing tax with your partner, particularly if one of you earns below the high-earner thresholds.

These latest changes highlight the importance of taking advice, especially if you’re not accustomed to the complex and opaque world of taxes and pensions. Above all, a comprehensive strategy, that considers all levers together, not just one in isolation, is the best way to determine your position. At AAB Wealth, we can consider and manage all of this for you, ensuring you’re not missing a trick.


Proposed Scottish income tax levels 2024/25

Starter rate (£12,571-£14,876) 19%
Scottish basic rate (£14,877-£26,561) 20%
Intermediate rate (£26,562-£43,662) 21%
Higher rate (£43,663-£75,000) 42%
Advanced rate (£75,001-£125,140) 45%
Top rate (£125,140) 48%

The personal allowance of up to £12,570 reduced by £1 for every £2 earned over £100,000.


By Lisa Tait

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