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Scottish Budget unveils new tax rate for higher earners

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The Scottish government has introduced a new tax rate for higher earners and a new tax threshold. Ian Holloway looks at the details of this week’s Scottish Budget.

20th Dec 2023
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As gloomy as the Welsh Budget (starting these are “tough times”) but more critical of the UK government, finance secretary Shona Robison presented the draft Scottish Budget in the Parliament yesterday (19 December).

This was the Minister’s first Budget and she made it clear it was the most challenging in recent devolution history.

The Tandem Tax (Income Tax)

The bands for the Scottish Starter and Scottish Basic rate will be increased by inflation in tax year 2024/25.  However, the threshold for starting to pay at the Scottish Higher will remain at £43,662 (calculated as £31,092 + the UK Personal Allowance of £12,570).

After much press speculation, Shona Robison confirmed there would be the introduction of a new tax rate with a new tax threshold. 

Assuming the taxpayer is in receipt of the personal allowance, the Scottish advanced rate of 45% will apply to earnings between £75,000 and £125,140, ie, it comes after the Scottish higher but before the Scottish top. With regards the top rate, this increases by 1p to 48p in the pound (48%). 

Scotland now has six tax bands, while the rest of the UK has three.

In comparison to tax year 2023/24, and assuming the taxpayer is in receipt of the £12,570 UK personal allowance, the income tax for Scottish taxpayers will be as follows:

 

Band

2023/24

2024/25

Rate Threshold Rate Threshold
   % £ % £
Scottish Starter 19 12,571–14,732 19 12,571–14,876
Scottish Basic 20 14,733–25,688 20 14,877–26,561
Scottish Intermediate 21 25,689–43,662 21 26,562–43,662
Scottish Higher 42 43,663–125,140 42 43,663–75,000
Scottish Advanced N/A N/A 45 75,001–125,140
Scottish Top 47 Over 125,140 48 Over 125,140
As above, Scottish taxpayers only pay tax at the above rates and thresholds for non-savings and non-dividend (NSND) income. Where there is income tax to pay on dividends or savings, this power has not been shared and the rates remain the same UK-wide.

Of course, the Scottish Budget contained references to the tax rates and thresholds for Scottish taxpayers and how they compared with taxpayers in other UK nations, some of whom may work for the same employer and do the same type of job. 

However, it is undeniable there are disparities between the rates and thresholds, especially when combined with the rates of Class 1 National Insurance. 

This arises from the fact that the Scottish government can set its own rates and thresholds (via sharing) and the reality that Class 1 National Insurance (NI) remains an issue reserved for the UK government and applies UK-wide.

Again in 2024/25, there is the income ‘touchpoint’ of earnings in the range £43,663 to £50,270.  The effective tax payable (Tax plus NI) by a Scottish Taxpayer jumps from 30% to 52% because:

  • Scottish Higher (42%) is payable when taxable earnings exceed £43,663 but the rest of the UK (rUK) higher rate only applies when earnings exceed £50,270 – the result of the sharing of income tax thresholds
  • National insurance is only payable at the highest rate (10%) on earnings up to £50,270 – the result of keeping this power in Westminster and not sharing

Using relevant income bands inclusive of the rUK personal allowance allows us to view the effective tax payable by a Scottish taxpayer and their rUK counterpart:

 

Income Band

Scottish Income Tax

rUK Income Tax

Class 1 NICs

Total

Scottish rUK
£ % % % %
0–12,570 0 0 0 0 0
12,571–14,876 19 20 10 29 30
14,877–26,561 20 20 10 30 30
25,562–43,662 20 20 10 30 30
43,663–50,270 42 20 10 52 30
50,271–75,000 45 40 2 47 42
75,001–100,000 45 40 2 47 42
100,001–125,140 * 45 40 2 47 42
Over 125,140 48 45 2 50 47

Importantly, note that the personal allowance reduces by £1 for every £2 the £100,000 threshold is exceeded meaning that it is £0 once earnings reach £125,140. Less allowances means more taxable pay, more income tax and, therefore, a higher ‘tax take’ for both Scottish and rUK Taxpayers, though higher for Scottish.

Of course, the above does not consider the implication of a taxpayer with a student loan repayment where there are other thresholds to take into consideration before there is a liability (the 6%, 9% or 15% (with Plans 2 and 3)).

Various sources will say, quite rightly, that Scottish taxpayers pay the highest amount of income tax in the UK. They do not mention that some of them will pay less in 2024/25 because of inflating the starter and intermediate thresholds in line with inflation. It is not up to me to make any political comment on this, save to say two things:

  • The average salary of a Member of the Scottish Parliament (MSP) is below the new Scottish advanced rate threshold. The average salary for a member of Parliament (MP) is above the threshold. Probably a coincidence, and
  • This is the reality of sharing and non-sharing. Being a Scottish taxpayer is not the same as being in other parts of the UK – much like riding a bicycle is not the same as riding a tandem!

The ‘bike taxes’ (the devolved taxes) and other

The two devolved taxes are Land and Buildings Transaction Tax (LBTT) and Scottish Landfill Tax (SLfT).  As with their comparisons in England and Northern Ireland (stamp duty and landfill tax), they are complicated and full of exceptions and exemptions. 

Together with non-domestic rates (NDR) / business rates, they are revenue-generating for Scotland, and, like Wales, it is worthwhile pointing to the headline announcements:

  • Page 25 of the Budget report maintains the current rates and thresholds of LBTT
  • Page 26 advises that SLfT rates will rise in line with inflation for the period 01 April 2024 to 31 March 2025. This maintains consistency with increases to the Welsh and rUK equivalents
  • Pages 27 and 28 cover NDR and the freezing of the basic property rate (on properties with a rateable value up to and including £51,000) with the Intermediate and Higher rates increasing by the rate of inflation. There will be 100% rate relief for the hospitality sector in island communities with the two-year phase out of Enterprise Areas relief.  All other existing NDR reliefs are maintained in 2024/25             

With regard other devolved taxes that Scotland has the power to use when (and if) they want:

  • There is still a commitment to replacing the UK’s air passenger duty with a Scottish air departure tax (ADT). However, there is still the ongoing exploration into ways that protects connectivity with the Highlands and Islands
  • The UK aggregates levy is intended to be replaced with the Scottish Aggregates Tax, possibly from April 2026
  • Look out for a devolved building safety levy, a cruise ship levy, a carbon emissions land tax, a non-domestic rates public health supplement and an infrastructure levy

Plus, legislation already exists for “VAT assignment”, where some of the VAT receipts are assigned to Scotland by HMRC (the UK’s tax collection agency). Work is ongoing on a model that will allow this.

Scotland has greater devolution powers compared to Wales; hence the Budget is wider and more detailed.

Summary

Both the Scottish and Welsh Budgets now go through the scrutiny stages in the Parliament (Scotland) and the Senedd (Wales), and they do not become final until early in 2024. 

Both Governments operate as minorities, however, have co-operation agreements in have with other Parties:

  • In Scotland, the Scottish National Party (SNP) have an agreement with the Scottish Greens, and
  • In Wales, Welsh Labour have an agreement with Plaid Cymru.

These agreements mean the minority administration will be supported at the time of the Budget Bill vote. So, you would hope there has been discussion before the draft Budgets were published on 19 December 2023 to prevent disagreement (as has been the case before). Nothing is final now, though it should be.

However, with regards income tax especially, there is a BIG factor to take into consideration and that is the contents of the UK Budget, expected in March 2024. 

Both the Scottish and Welsh governments have made spending and saving expectations based on what is known now. If, as expected, the Chancellor of the Exchequer offers tax cuts and they are effective 2024/25, this throws the devolved administration’s plans up in the air. 

Both may be forced to revise their tax and spending plans, if only not to be seen by the electorate as varying considerably for their respective taxpayers. 

The pain point here is that both sets of income tax plans in Scotland and Wales must be set by resolution before the start of the tax year – and remain that way for the rest of the tax year. 

So, it’s eyes-down for the contents of the UK Budget and, possibly, a scramble of MSPs and Members of the Senedd (MSs) who will have to revise things before 06 April 2024.

As the Budgets prove, and as I always say, just because an announcement is made in Westminster doesn’t mean it applies UK-wide. We must respect the fact that things differ in the one United Kingdom. 

However, the devolved administrations are impacted greatly by the decisions of the UK government and it’s the ‘rabbit out of the hat’ Spring Budget next year that will be keeping politicians awake in Scotland and Wales. 

Replies (12)

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By FactChecker
20th Dec 2023 13:56

"The pain point here is that both sets of income tax plans in Scotland and Wales must be set by resolution before the start of the tax year – and remain that way for the rest of the tax year.
So, it’s eyes-down for the contents of the UK Budget and, possibly, a scramble of MSPs and Members of the Senedd (MSs) who will have to revise things before 06 April 2024."

The pain point will (actually already has) arrived for software developers ...
... so Happy Holiday wishes to programmers and all those involved in testing/upgrading software for 2024/25 - you weren't already doing anything important were you?

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By Liam.em
21st Dec 2023 10:26

I hope that Berwick is ready for those who are about to move across the border...

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By ajkidd
21st Dec 2023 12:03

It's Scottish National Party not Scottish Nationalist Party.

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Replying to ajkidd:
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By Wendy McAngus
21st Dec 2023 18:18

Thanks for pointing that out. That’s now been corrected.

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Replying to Wendy McAngus:
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By mumpin
22nd Dec 2023 14:00

I always use Nationalist because it annoys their supporters.

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By Justin Bryant
22nd Dec 2023 09:53

Seems like a very good idea if you're worried about excessive immigration of very rich people!

Thanks (1)
Donald MacKenzie
By Donald MacKenzie
22nd Dec 2023 10:25

The table has errors

The line 25,562–43,662 20 20 10 30 30

should be 26,562–43,662 21 20 10 30 30

Scottish Intermediate 21 25,689–43,662 21 26,562–43,662

The sleight of hand is to have created a narrow band where £2,300 is taxed at lower rate of 19%. This allows the SNP to claim most taxpayers pay less tax, when the biggest gain is £23 a year, but a Scot earning £50k is paying over £1,500 extra tax.

SNP see creating "difference" as more important than setting conditions to boost enterprise and growth.

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By Mallock
22nd Dec 2023 11:14

I've had a mixed bag reaction to this budget. One MD has already moved to the north of England and is now contemplating moving the management and executives to an office in England, leaving only the lower paid admin jobs in Scotland - a lot of the management team are not Scottish in any case and he can't encourage talent to move north because of the tax differences and much higher "Stamp Duty".
A life long SNP voter and business owner told me this budget made him realise the SNP are not the party for small business and people who want to better themselves so he will be voting differently next time. He is also worried about his children's access to University education because the SNP have created an environment where children from better areas and private schools are positively discriminated against when it comes to obtaining a place. A senior lecturer at a University tells me this policy leads to poorer quality students and lots of drop outs.
Several doctors/consultants have said they are going to move to a 4 day week and/or refuse additional hours or shifts because the marginal rate between £100K and £125,140 is 67.5% + 2% NI.
One client thinks it's a good idea!
Me? I'm retiring soon.

Thanks (2)
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By GrayMan
22nd Dec 2023 12:49

It depends on whether you subscribe to the view that if you tax those with higher incomes at higher rates, “All the best brains will flee the country.” This would only be true if all the best brains were the highest income earners but they aren’t. I cannot see that brain surgeons, barristers & lawyers, or even accountants (chartered or otherwise) would rush to live and sell their skills in a banana republic because there isn’t the demand there and generally these countries can't provide the standard of living they expect. Ideally, incomes & profits should be taxed in the countries they are earned or generated. To do otherwise is a betrayal of the trust of the people who generate those profits.

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Replying to GrayMan:
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By Mallock
22nd Dec 2023 13:20

Are you calling England a Banana Republic?
In 2023 we lost 3 clients to Dubai and they are now running their companies from the sun. We also lost 2 doctor clients to Australia, one to Canada and one to New Zealand. When Margaret Thatcher reduced the top rate of tax from 60% to 40% there was an increase in the amount of tax collected - people need to have an incentive to work and work hard. Losing almost 70% of what you worked for isn't much of an incentive to take on extra hours or even to stick to normal hours if you fall within that band. Tax policy creates changes in the behaviour of those who are taxed and the problem with most Politicians is that they don't consider/appreciate the impact of the changes they introduce and they never get the outcome they thought they would get.

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Replying to Mallock:
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By GrayMan
23rd Dec 2023 09:55

I didn't say the UK was a banana republic, although it's only marginally better for the majority. I doubt the doctor clients who resettled in the countries you mentioned did so exclusively for tax reasons. There is a shortage of medical staff, particularly in Australia where they earn far more and are treated far better than in the UK. What you suggest Thatcher achieved in tax take is easily achievable if directors or those in a position to do so pay themselves higher salaries to take advantage. Whether this generated extra effort on their part is highly doubtful. Thatcher's government also kept all the profits on council housing, reimbursing council only the original cost of construction and the UK has never recovered from this. The UK tax system is not fit for purpose due to tax evasion. Profits or incomes generated in the UK should be taxed here, wherever the companies or persons are based.

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By rmillaree
22nd Dec 2023 13:32

" They do not mention that some of them will pay less in 2024/25 because of inflating the starter and intermediate thresholds in line with inflation."

Lol the 19% rate imho only exists for specific grandstanding purposes so the snp can say "the majority of scots pay less taxes" they have clearly set the thresholds so that the statements can be true.

The reality is teh peeps who are better off are £20 better off - i suspect it costs more to adminstor the 19% rate than it actually collects

If we look at the saving by inflationary increase ref 19% band it amounts to less than £1.50 benefit per person per year. Whilst any saving is worthwhile this 19% rate is crearly done for marketing purposes rather than the purposes of helping the neady - the benefit of the 19% band being less than 50p per week really isnt any sort of material help despite the fact they trumpet this fact very loudly.

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