Scottish govt introduces 45% tax band for higher earners

As part of its Budget, the Scottish government announced that for 2024‑25, the starter and basic rate income tax bands will be increased by inflation to £14,876 and £26,561 respectively. 

The starter, basic, intermediate and higher tax rates will remain unchanged. 

The higher rate threshold and top rate threshold will remain unchanged but a new advanced rate will be introduced at a rate of 45p applying to income over £75,000. 

An additional 1p will be added to the top rate, increasing the rate from 47p to 48p on income over £125,140.

These changes are proposed to take effect from April 6, 2024 when there will be six income tax bands in the Scottish income tax system compared to three in England and Wales.

This government does believe that those with the broadest shoulders should pay a higher tax rateShona Robison, Scottish deputy first minister

Introducing the new tax band and increasing the top rate by 1p is estimated to raise an additional £82mn in 2024-25.

The Scottish government also estimated that freezing the higher rate threshold in 2024-25 has added an additional £307mn to the Scottish income tax forecast.

Shona Robison, Scottish deputy first minister and finance minister, said: "We do not believe that those people who are the backbone of our public service – our teachers, our police officers, our nurses – should see their tax rate increase.

"But, when public services need investment and protection from UK government cuts - this government does believe that those with the broadest shoulders should pay a higher tax rate. And, to be clear, by the broadest shoulders, I mean the top earning taxpayers.

"We have chosen to create the new band at a threshold above the top of the unpromoted teacher salary scale, above a police chief inspector, and above a band 8b nurse."

Clare Stinton, head of workplace savings at Hargreaves Lansdown, said: “Higher taxes for higher earners is how Scotland has chosen to address funding shortfalls - in the words of Shona Robison, ‘those with the broadest shoulders are asked to contribute a little more.’

“People living and working in Scotland already face higher taxes than their English, Welsh and Northern Irish neighbours. 

“The hikes announced today will no doubt come as unwelcome news to Scottish households caught in the net of the new ‘advanced’ tax band, who will face paying thousands more than their counterparts residing elsewhere in the UK.”

Scottish Income Tax Bands 2024-25

David Phillips, associate director at the Institute for Fiscal Studies, pointed to the fact that the Scottish Fiscal Commission - the Scottish equivalent of the Office for Budget Responsibility - estimated 90 per cent of this tax increase would disappear through behavioural changes by taxpayers to avoid paying it.

He said: "While small beer in the context of the Budget, the income tax increases announced in the Budget are more sizeable for those affected by them. For example, a Scottish taxpayer with an income of £125,000 will pay £5,221 more in income tax than they would in the rest of the UK - equivalent to a 7 per cent hit to their post-tax income.

"At some stage, the Scottish Government will have to look beyond income tax (for example to council tax) if it wants to continue raising revenue from richer Scots."

Jon Greer, head of retirement policy at Quilter, said one way Scots caught in the new tax band might seek to avoid it could be through increased pension contributions.

“Since pension contributions can be used as a means to reduce taxable income, individuals in the new 45 per cent bracket might see an increased incentive to contribute more to their pensions, effectively reducing their taxable income and gaining more from the tax relief available on pension contributions,” Greer explained.

“However, this strategy's efficacy depends on several factors, including individual financial situations and the specifics of their pension schemes. Clarity on this needs to be given to be swiftly to ensure they can plan effectively.”

He added: “For those in pension schemes operating under the 'relief at source' method, where tax relief is claimed back from HMRC, there could be complexities in claiming the full relief owed, especially for those unfamiliar with detailed tax filings. This could mean that some miss out on increasing their pension contributions while reducing their taxable income.

“The changes also highlight the importance of financial planning and getting advice, especially for those who might not be accustomed to engaging with the complexities of tax returns and pension contributions as they find themselves paying more tax than they were used to.”

amy.austin@ft.com