The Association of British Insurers - which includes Scottish life offices - this week said it was lobbying the Government to limit tax relief on pensions to the UK rate of income tax.
If the Government agrees, the change will mean Scottish pension savers can only get tax relief at the UK rate of income tax - even though they could be paying up to 3 per cent more tax than their English counterparts.
Until now, the principle has always been that pensions savings attract tax relief at the saver's highest tax rate.
The Government currently plans to give tax relief on pensions at the marginal rate - so Scottish savers paying up to 26 per cent under a Scottish parliament would also get tax relief at 26 per cent.
But insurers have complained this will make it much more difficult to administer pensions because their computer systems would have to distinguish between Scottish and English taxpayers. If Scottish income tax is at 26 per cent and UK income tax is at 23 per cent, they want Scottish taxpayers to get just 23 per cent relief.
A spokeswoman for the Association of British Insurers says: "This could be an administrative nightmare. It would be very difficult to identify whether someone was living in Scotland but working in England or vice versa."
The change would be dealt with in regulations under the Scotland Bill, currently reaching its last stages of debate in the House of Lords. Barring government defeats, it will be given Royal Assent by the autumn.
John Swinney MP, Treasury spokesman for the Scottish National Party, says: "We want people to benefit as much as possible from Scotland's tax- varying powers. And we are anxious to ensure conditions are as advantageous as possible for people under devolution." He adds that the desire of Scottish life insurers to simplify matters must be balanced with policyholders' wishes.
However, the move would prove doubly controversial with occupational pension schemes. Ironically, the National Association of Pension Funds believes it will make matters more complicated for them, not less.
Unlike personal pensions run by life insurers, savings to occupational schemes are paid out of untaxed income - that is, the money goes in before it is taxed. (With personal pensions, a rebate is paid on contributions made from income that has already been taxed). Thus employers - rather than insurers - would be forced to work out who is a Scottish and who is an English taxpayer.
The SNP is already annoyed at the way the Inland Revenue has tried to define who is a Scottish and who is an English taxpayer.
Apparently concerned that people will go to the lengths of working in Carlisle (23 per cent tax) and living in Dumfries (up to 26 per cent), Inland Revenue officials have tried to define Scottish taxpayers according to the number of days they spend in Scotland and where their main residency is - throwing up some interesting absurdities.
Under the draft legislation, someone who leaves Dumfries at 11.59pm on Tuesday night and gets back from Carlisle by 12.01am on Thursday morning is an English taxpayer for that day. A minute later leaving, or a minute earlier returning, and he or she becomes a Scottish taxpayer.
"You could be an English taxpayer if you do the nightshift but a Scottish taxpayer if you do the dayshift," Mr Swinney said. "This are probably about five people in the whole of the UK to whom this might apply. But employers are going to have to check information on 3.5 million Scottish employees to see if they are dodging the system. It would be much more sensible simply to sent a tax return to the principal place of residence."Reuse content