Smith Commission legislation – pensions implications

The UK Government has now published draft legislation to take forward the proposals of the Smith Commission on further devolution for Scotland.

23 January 2015

The UK Government yesterday published draft legislation which is intended to implement the recommendations of the Smith Commission for further devolution to Scotland. While the legislation does not make specific changes in respect of pensions, the proposed changes to taxation will have significant implications for pension schemes both north and south of the border.

The draft legislation permits the Scottish Parliament to vary income tax rates and thresholds for non-savings and non-dividend income. Under the plans the taxation of dividend and savings income and the personal allowance available for all income tax will continue to be decided by Westminster and control over tax reliefs will also remain at Westminster. While the legislation published yesterday seeks to make the necessary changes to the law, it will be critical to examine the approach of HMRC in terms of identifying Scottish and rest of UK taxpayers. This distinction will become particularly significant if a different approach to income tax is adopted between Scotland and the rest of the UK and it may become a significant area of dispute by taxpayers.

For pension schemes it will be necessary to establish systems to distinguish between Scottish taxpayers and rest of UK taxpayers in order to ensure that the appropriate rates and deductions are applied. This was already required in light of the Scottish Rate of Income Tax due to apply from April next year under the Scotland Act 2012 but this distinction will become increasingly more important. In establishing the appropriate systems, pension schemes should consider any relevant guidance provided by HMRC and any developments over the coming months should therefore be closely observed.

We will keep you updated throughout the progress of the draft legislation through the UK Parliament.

Our Constitutional Reform and EU Group has prepared commentary and analysis on all of the key clauses published yesterday and this is available here.