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Higher income earners in Scotland will have to pay hundreds of pounds more income tax next year after Humza Yousaf’s government introduced a new rate of 45p as part of a threefold increase.
Shona Robison, the SNP’s finance minister, used the Scottish budget to announce the new ‘advanced’ tax rate for higher incomes, which will be applied to incomes between £75,000 and £125,140 from April next year.
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 group 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 incomes between £100,000 and £125,140 will pay an effective rate of 67.5 per cent on this portion if the tax-free personal allowance is withdrawn. When National Insurance is taken into account, this rises to 69.5 percent.
Ms Robison also increased the top tax rate in Scotland by 1p to 48p, affecting 40,000 workers with incomes of more than £125,140. That’s 3 cents per pound higher than the top rate south of the border.
In the biggest tax coup of all, she imposed a £307m stealth tax by freezing the salary threshold for the higher 42p rate at £43,663, rather than increasing it with inflation.
The move will also impact middle-income workers such as teachers, police officers and NHS staff through “tax barriers”. This means more Scots will be sucked 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 rise.
The increases also mean that the cross-border tax gap between Scotland and England is widening 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, estimates that workers will pay £1.5 billion in extra income tax next year compared to what would be levied in the rest of Britain.
But the new tax band will only raise £74m and the 1p rise in top rate £8m. Projected revenue from the two increases was reduced by £118 million due to a change in the behavior of higher earners who wanted to avoid them.
This could include being denied promotions, working shorter hours or receiving dividends, which are taxed at a lower rate by the UK government.
For thousands of Scots, the changes will negate the impact of the Chancellor’s decision to cut national insurance payments from January 6. They were expected to benefit on average by £340 if the headline rate is reduced from 12 per cent to 10 per cent across the country. the UK.
On Monday, Rishi Sunak warned Prime Minister Yousaf that raising income taxes was once again damaging the UK government’s efforts to help families and businesses through the cost of living crisis, arguing that “we need to cut taxes and should not increase.”
But Ms Robison told MSPs that the Chancellor’s autumn statement had “prioritised tax cuts at the expense of public services”, adding: “That cannot be right.”
Announcing the income tax changes, she said: “We are proud that Scotland has the most progressive income tax system in Britain, protecting those who earn less and asking those who earn more to contribute more. This allows us to offer a more extensive range of services than in the rest of the United Kingdom.
“These targeted tax decisions are expected to increase our income tax revenues by £389 million and have been carefully balanced against the needs of individuals, businesses and the wider economy, while ensuring we continue to build on our progressive approach to taxation.”
But Tracy Black, the director of CBI Scotland, said: “The decision to introduce an advanced tax rate will damage Scotland’s ability to attract highly qualified workers and our competitiveness nationally and internationally.”
Bruce Cartwright, the chief executive of the Institute of Chartered Accountants of Scotland, said the Scottish budget is “both short-sighted and fails to stimulate sustainable economic growth”.
He added: “Implementing further tax increases on higher incomes is not a sustainable long-term solution and will have a negative impact on Scotland’s positioning as an attractive place to live and do business.
“Scotland already has five of the highest tax bands in Britain, and these changes will have an impact on the growth of the Scottish economy, while only covering 5.4 percent of the budget deficit.”
The CIOT warned that the cross-border tax gap could widen further if the Chancellor announces income tax cuts in the rest of the UK in his expected March Budget.
Sean Cockburn, the chairman of the Scottish Technical Committee, said: “The Scottish Government’s income tax plans are widening the gaps between higher earners in Scotland and the rest of Britain and we cannot rule out the possibility that the gaps will widen further in the spring. can increase.
“A sixth income tax bracket will inevitably bring further complications for affected taxpayers. That can pose problems knowing when different income tax rates apply and how to ensure the right amount of tax relief is applied to things like Gift Aid and pension contributions.
‘Chaotic budget of an incompetent government’
The personal allowance of £12,570 – the amount workers can earn before paying income tax – is the same across Britain. Next year in Scotland, a starter rate of 19 per cent will be charged on incomes up to £14,876, after which the basic rate of 20 per cent will apply to salaries up to £26,561.
Ms Robison said she had increased both thresholds with inflation compared to this year, but an economist at the Fraser of Allander Institute said they had risen by just one per cent and 3.4 per cent respectively.
Joao Sousa, the institute’s director, said this would mean that “budget pressures are still causing people to pay more taxes than before.”
An intermediate rate of 21 per cent is 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. By comparison, the higher rate in the rest of Britain is 40 percent and starts at a salary of £50,271. The new advanced rate of 45p and the highest rate of 48p will be charged above this in Scotland.
Ms Robison said she would provide £140 million to local authorities to implement a council tax freeze – the same amount they would have received if they increased the levy by five per cent.
Michael Marra, Scottish Labor finance spokesman, said: “This is a chaotic budget from an incompetent government that is causing ordinary Scots to pay more and get less in return. This government’s failure to focus on the country’s priorities over the past sixteen years means they are now demanding that taxpayers bail them out.”