Bad Santa delivers a tax blow for the Scottish taxpayer

When Shona Robison, Scotland’s deputy first minister and finance secretary stood up to deliver the Scottish budget, taxpayers may have been hoping for some pleasant pre-Christmas surprises. Instead, whilst there were welcome inflationary increases in the starter and basic rate thresholds, the announcement of a new advanced tax rate of 45% for Scottish taxpayers earning between £75,000 and £125,140 feels more like a gift from Bad Santa. There was further bad news in the announcement of a freeze of the threshold at which individuals start paying higher rate tax, and an increase in the top rate of tax from 47% to 48%.

As the personal allowance is reduced by £1 for every £2 of income over £100,000, the new advanced tax rate also means Scottish taxpayers will suffer an effective rate of tax, including National Insurance contributions (NICs), of a whopping 69.5% on income between £100,001 and £125,140. Even if you put the NICs misalignment with the main UK tax bands and other tax issues, like the personal allowance tapering or the high income child benefit charge, to one side, the unfortunate Scottish taxpayer now potentially suffers tax at six different headline Scottish income tax rates.

The income tax changes fall primarily on the top 20% of earners, with those earning under £75,000 being marginally better off when compared to the 2023/24 Scottish income tax rates and bands. Beyond that the however, the picture is very different.

Taken together, these changes mean an individual earning, for example, £140,000 a year will be more than £2,000 worse off in 2024/25 compared with the current tax year.

Taxpayers that reside in Scotland are subject to different income tax rates and thresholds to taxpayers in the rest of the UK, whilst being subject to the same NICs thresholds. The higher rates of tax payable by Scottish taxpayers mean that the individual earning £140,000 a year is in far worse a position than an equivalent taxpayer who is resident in England, paying almost £5,700 per annum more in income tax and NIC.

Such a discrepancy in tax bills will lead to concerns of a ‘brain drain’ from Scotland to south of the border, which will potentially have a major negative impact on the amount of additional tax collected. Indeed a recent report by the University of Strathclyde indicates that, taken alone, the introduction of the 45% tax rate could lead to a loss of the desired tax yield of as much as 54%.