With the Union preserved, employers need not worry about the onerous funding rules that can apply where a defined benefit scheme operates in more than one EU Member State, nor navigate separate Scottish pension regulations.   However, stronger tax-varying powers for the Scottish Parliament could affect both tax relief on pension contributions and the tax due on pension payments.

Arthur Zegleman, senior consultant in Towers Watson’s Edinburgh office, said: “Even before the Unionist parties committed themselves to ‘home rule’, Holyrood was due to get more powers over income tax from 2016. UK tax rates are set to fall in Scotland, with a new Scottish rate introduced.  If the Scottish tax rate were anything other than 10p in the pound, income taxes would differ north and south of the border.  Of course, the Scottish Parliament has yet to use the limited tax-varying powers that it has enjoyed for the past 15 years, but pension schemes will need to be ready for when this is no longer just a hypothetical challenge.

“When employees pay into an employer’s personal pension scheme or the National Employment Savings Trust, their contributions come out of post-tax income. Tax relief arrives in the form of a top-up from HMRC.  In future, the size of the top-up that a scheme needs to claim could vary according to whether the individual’s main residence is in Scotland.   Until 2018, HMRC plans to make uniform payments regardless of where the individual lives and balance things out by adjusting how much tax it takes out of their pay, but that is only a temporary sticking plaster. 

“Things are more straightforward for most occupational schemes, including those in the public sector, where pension contributions are simply paid from pre-tax income.  However, these schemes face having to deduct different amounts of tax from the pensions they pay out.” 

Further strengthening the Scottish Parliament’s powers opens the door to more pronounced differences in income tax.  The Conservatives and Liberal Democrats have proposed giving the Scottish Government complete freedom over tax rates and thresholds (though not the tax-free personal allowance);  Labour thinks it should be allowed to vary all rates by up to 15p (instead of 10p under the Scotland Act 2012) and to increase the two highest rates of tax.  With the referendum over, the SNP Scottish Government is likely to publish its own proposals for devolution, which should be more radical than anything put forward by the other three parties.

Zegleman said: “How pensions tax relief will be affected may depend on how the UK Parliament fleshes out these powers.   For example, we have not seen any suggestion that Scottish Government’s income tax powers should extend to unilaterally ending marginal rate tax relief; the SNP Government suggested that future administrations might have wanted to contemplate this following independence.”