Many residents across the country have been writing their Christmas list asking Santa to give them a Christmas cracker in the shape of a tax rate reduction in yesterday's Scottish Budget, but instead some will have been left with a pre-Christmas tax hike.

Scottish Finance Minister Shona Robison introduced the rumoured 45% Scottish rate of income tax for those earning between £75,000 and £125,140 and explained that ”those with the broadest shoulders are [being] asked to contribute a little more".  On top of that those earning the most in Scotland didn’t go unscathed with a further increase of the top rate from 47% to 48% for those earning over £125,140.

A Scottish resident taxpayer will now be juggling up to 12 different tax rates and 10 tax bands. 

It’s no longer a simple affair to understand how much tax you pay in Scotland on your income and as Scottish taxes continue to diverge from the rest of the UK tax rates and tax bands, there could be a wider economic impact for Scotland in trying to attract talent North of the border. I believe this could particularly impact the financial services sector in Edinburgh, and across Scotland, and these tax changes could see them struggle to compete with the other key financial hubs being London, Bristol and Manchester.  

It was no coincidence that when the UK Chancellor Jeremy Hunt announced his reforms to deliver the ‘benefits of Brexit’ for the UK financial services sector in December last year that he did so in Scotland’s Capital and called it the Edinburgh Reforms.  It had already been noted last year that there was a more marked decline in financial services jobs in Scotland than in the rest of the UK.  The further increase to tax rates is unlikely to help to attract that talent to the Capital.

In addition, these further increases to tax rates will reduce the spending power in the Scottish economy for those facing the brunt of these increases.  Someone earning between £100,000 and £125,140 was already experiencing a 63% effective tax rate in Scotland (plus the 2% national insurance burden), due to the loss of the tax-free personal allowance.  This will be a 67.5% tax rate by 6 April 2024 (plus 2% national insurance).    

Even without this tax rate increase, some have argued that what the Scottish taxpayer needs instead is a tax reduction.  In fact, individuals earning over £28,000 already pay more tax than their UK counterparts.  Someone earning £50,000 in Scotland will pay £1,542 more next tax year than their UK counterpart.  The tax differential increases as income rises, with someone earning £150,000 in Scotland set to be £5,900 worse off in 2024/25 now this latest tax rate increase has come into play.

  With over 39% of Scotland’s adult population not currently paying any income tax - based on figures published by the Scottish Government in December 2022 - it had been suggested that the focus should potentially have been redirected into ways in which the country can increase the taxpaying workforce, as that in turn would generate more tax revenues, as well as reduce the Scottish Budget deficit.

Time will tell if the new 45% advanced tax rate for those earning between £75,000 to £125,140, as well as the increased top rate from 47% to 48%, will bridge the financial gap in the budget.  The Scottish Government may find that behavioural changes within the group of higher earners, be that by spending less in the local economy, voting with their feet or using other financial levers to dial down income needs in the interim could contribute to the financial gap widening.  In particular, as the UK government has increased the amount individuals can contribute to their pensions, the importance of pension tax planning has only become more important for the Scottish higher earner.

It is clear it was always going to be difficult for the Scottish Government to please everyone with decisions like this, and they’ll be aware further tough decisions lie ahead given the ongoing pressures on public finances.

Visit our Budget Hub to find out more.