In response to the cost-of-living crisis in Scotland, the Scottish government led by Humza Yousaf has implemented three adjustments to income tax. As a result, the middle class in Scotland will be compelled to pay hundreds or even more in income tax next year.
Scotland’s Finance Secretary, Shona Robison of the Scottish National Party, announced a new “higher” tax rate of 45%, applicable to high earners with annual incomes between £75,000 and £125,140 starting from April next year.
Additionally, Ms. Robison announced an increase in Scotland’s top tax rate by 1%, reaching 48%, applicable to all incomes exceeding £125,140. This is 3% higher than the highest tax rate south of the border.
Global evidence from countries with varying internal income tax rates, primarily Switzerland and the United States, suggests that people tend to move from high-tax areas to low-tax areas. Some entrepreneurial cities along the England-Scotland border, such as Newcastle and Lancaster, have already begun advertising themselves as places where you can “lower your tax bill without moving far.”
Furthermore, by freezing the salary threshold for the 42% higher tax rate at £43,663 (without adjusting for inflation), the Scottish government quietly secures an additional £307 million in tax revenue.
The aim of these measures is to boost the salaries of middle-income groups such as teachers, police officers, and NHS staff through “fiscal uplift.” This means that as annual salaries increase, more Scots will be forced to pay higher tax rates. Those earning over £43,663 annually will also see a noticeable increase in their tax bills.
Moreover, this change widens the tax gap between Scotland and England. Individuals working in Scotland with annual incomes over £27,850 will pay more income tax than when living in England. Those earning over £50,000 annually will pay an additional nearly £1,500 per year.
For thousands of Scots, this will offset the positive impact of the Chancellor’s decision to reduce national insurance contributions starting from January 6. Initially, they could benefit from a reduction in the main tax rate from 12% to 10% nationwide, saving an average of £340 per person.
In a statement to the Scottish Parliament, the Finance Secretary argued that these “increases” are necessary to fill a £1.5 billion fiscal gap in the Scottish National Party’s spending plans for 2024/25.
However, economists warn that the new tax rates may only generate around £40 million in revenue, and due to changes in the behavior of high earners, tax revenue may significantly decrease. For instance, they may reject promotions, reduce working hours, or opt to be compensated through dividends (which are taxed at a lower rate by the UK government). On Monday, UK Prime Minister Sunak warned Yousaf that raising income tax again would undermine the UK government’s efforts to assist families and businesses in addressing the cost-of-living crisis, stating that “we should be cutting taxes, not raising them.”
He argued that Scotland is already the highest-taxed region in the UK, and the Scottish government, led by Yousaf, is demanding more from people when their household budgets are squeezed, leaving them owed an explanation.
This move has sparked considerable opposition. In a situation where the economy is stagnant, government spending is extravagant, and there are significant budget gaps, people may have expected the Scottish Finance Secretary to propose a series of measures to stimulate economic growth. Instead, the outcome is surprising.
Some believe that these actions will create a more complex Scottish tax system. As is well known, the more complex a system becomes, the less efficient it is. The UK not only needs lower taxes but also simpler taxes. Yet, Scotland is set to implement a perplexing set of different tax rates, making it almost unclear whether it’s worth accepting a promotion or pursuing a high-paying job, or even working overtime, as it seems the more you earn, the more you have to give back.