SNP hits high and middle earners with triple tax hike

Higher earners in Scotland face paying over £5,000 more in income tax next year than if they lived in England after Humza Yousaf’s government introduced a new 45p rate as part of a triple hike.

Shona Robison, the SNP finance secretary, used the Scottish Budget to announce the new “advanced” tax rate for higher earners, to be applied to income between £75,000 and £125,140 from next April.

It means Scotland will have six income tax bands, double the three south of the border, prompting warnings of a brain drain of the best talent to England.

The Chartered Institute of Taxation (CIOT) warned that around 114,000 Scots in this band will pay up to £1,871.13 more income tax next year, and up to £5,231.81 more than someone on the same salary in other parts of the UK.

Those with income between £100,000 and £125,140 will pay an effective rate of 67.5 per cent on this slice as the tax-free personal allowance is withdrawn. This rises to 69.5 per cent when National Insurance is taken into account.

Ms Robison also increased the top rate of tax in Scotland by 1p to 48p, hitting 40,000 workers with income over £125,140. That is 3p in the pound higher than the top rate south of the border.

In the largest tax grab of all, she imposed a £307 million stealth tax by freezing the salary threshold for the 42p higher rate at £43,663 rather than increasing it by inflation.

The move will also affect middle income workers such as teachers, police officers and NHS staff through “fiscal drag”. This means more Scots will be dragged into paying the higher rate when they get their annual pay rises. Those already earning more than £43,663 will also see their tax bills increase.

The rises also mean the cross-border tax gap between Scotland and England widens further, with someone earning £100,000 paying £3,346 more than if they lived south of the border. Anyone earning £28,867 will pay more in Scotland.

The Scottish Fiscal Commission, which provides SNP ministers with official forecasts, estimated that workers will pay an extra £1.5 billion income tax next year compared with what would be charged in the rest of the UK.

But the new tax band will generate only £74 million and the 1p rise in the top rate £8 million. Projected revenue from the two increases was slashed by £118 million thanks to behavioural change from higher earners wanting to avoid them.

These could involve refusing promotions, working shorter hours or getting paid with dividends, taxed at a lower rate by the UK Government.

For thousands of Scots, the changes will wipe out the impact of the Chancellor’s decision to cut National Insurance from Jan 6. They were expected to benefit by an average of £340 when the main rate is reduced from 12 per cent to 10 per cent across the UK.

On Monday, Rishi Sunak warned Mr Yousaf, the First Minister, that increasing income tax again damaged the UK Government’s efforts to help families and businesses through the cost of living crisis, arguing that “we should be cutting taxes, not raising them”.

But Ms Robison told MSPs that the Chancellor’s Autumn Statement had “prioritised tax cuts at the expense of public services”, adding: “That can’t be right.”

Announcing the income tax changes, she said: “We are proud that Scotland has the most progressive income tax system in the UK, protecting those who earn less and asking those who earn more to contribute more. This in turn allows us to provide a more comprehensive set of services than in the rest of the UK.

“These targeted tax decisions are expected to increase our income tax revenue by £389 million and have been carefully balanced with the needs of individuals, businesses and the wider economy, while ensuring we continue to build upon our progressive approach to taxation.”

But Tracy Black, the director of CBI Scotland, said: “The decision to introduce an advanced rate of tax will harm Scotland’s ability to attract highly skilled employees and our competitiveness nationally and internationally.”

Bruce Cartwright, the chief executive of the Institute of Chartered Accountants of Scotland, said the Scottish Budget was “both short-sighted and fails to drive sustained economic growth”.

He added: “Implementing further tax increases on higher earners is not a long-term sustainable solution and will have a negative impact on positioning Scotland as an attractive place to live and do business.

“Scotland already has five of the highest tax bands in the UK, and these changes will impact the growth of the Scottish economy while only covering 5.4 per cent of the budget deficit.”

The CIOT warned that the cross-border tax gap could widen even further if the Chancellor announces income tax cuts in the rest of the UK in his expected March Budget.

Sean Cockburn, the chairman of its Scottish technical committee, said: “The Scottish Government’s income tax plans increase divergence between higher earners in Scotland and the rest of the UK and we cannot rule out the possibility that divergence could widen further in the spring.

“A sixth income tax band will inevitably mean further complications for affected taxpayers. That can include difficulties in knowing when different rates of income tax apply and how to ensure that the appropriate amount of tax relief is applied to things like Gift Aid and pension contributions.”

‘Chaotic budget from an incompetent government’

The £12,570 personal allowance – the amount workers can earn before they start paying income tax – is the same across the UK. A 19 per cent starter rate will be levied in Scotland next year on income up to £14,876, at which point the 20 per cent basic rate will kick in for salaries up to £26,561.

Ms Robison said she had increased both the thresholds by inflation compared to this year, but an economist at the Fraser of Allander Institute said they had risen by only one per cent and 3.4 per cent respectively.

Joao Sousa, the institute’s director, said that this would mean “that fiscal drag is still bringing people into paying more tax than beforehand”.

An intermediate rate of 21 per cent will be charged on income up to £43,662, before the higher rate of 42 per cent is applied to salaries between £43,663 and £125,140. In comparison, the higher rate in the rest of the UK is 40 per cent and kicks in at a salary of £50,271. The new 45p advanced rate and the top 48p rate will be levied in Scotland above that.

Ms Robison said she would provide £140 million for local authorities to deliver a council tax freeze – the same amount they would have received by increasing the levy by five per cent.
 
Michael Marra, Scottish Labour’s finance spokesman, said: “This is a chaotic budget from an incompetent government that will leave ordinary Scots paying more and getting less in return. The failure of this government over 16 years to focus on the priorities of country rather than party means they are now demanding that taxpayers bail them out.”