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- Scotland’s income tax system is moving away from the rest of the UK, but the behavior of high earners is constraining further progress.
- As in other parts of the UK, the big tax dragnet is the freezing of thresholds, with many middle-income earners now secretly stuck with higher tax bills.
- Low-income earners were exempt from paying income tax, but this has been reversed. By 2027, Britain’s personal allowance will be worth the same real value as it was in 2013.
Happy New Year. Today he starts the 2024-25 financial year, so he could be paying a third less National Insurance contributions than he did this time last year. Alternatively, as his salary rises, so does his income tax rate, so he could be paying more tax if he earned more than £75,000 in Scotland during the new financial year.
If you own a holiday home in Scotland, your council tax bill could double unless it’s in the Falkirk, Glasgow or North Ayrshire council areas.
Additionally, if you operate your business in a large facility, you will be facing undesirable business rate increases. Retailers are particularly unhappy about this.
The National Insurance cut will offset the income tax rise for higher-income Scots, meaning only those earning more than £112,000 will have larger deductions from their payslips than in the previous financial year.
However, the large tax increase is a hidden tax increase that is “a drag on public finances.” Years of high price inflation have resulted in high wage inflation. And low-income earners found themselves starting to pay income tax once their income exceeded £12,570. This starting threshold, which is part of Scottish income tax administered by the UK government, has remained largely unchanged while wages have fluctuated.
The past decade’s policy of leaving more people out of the income tax net has been reversed, and the proportion of workers who have to pay income tax is likely to return to a similar level. The actual value of the starter standard by 2027 will return to 2013 levels.
Many second property owners face double council tax bills
Another pain threshold is 43,663 pounds. Above that, you’ll be taxed at 42p for every additional pound you earn, plus 21p on any pounds below that.
Dubbed ‘high tax rate’, this is aimed at those on high incomes, and in 2017 it affected just one in eight taxpayers on the £43,000 threshold. The threshold rose by just £663, but profits rose even more sharply. More than one in five income tax payers are currently being taxed at the ‘higher rate’ (confusingly, the third highest rate in Scotland).
The Scottish Finance Commission estimates that fiscal resistance has raised an additional £320m in just two years in Scotland.
Similar fiscal restraint measures have been applied by the UK Treasury, with lower interest rates and higher thresholds. Salaries and pensions over £50,270 are tax deductible at 40p per £1. The Office for Budget Responsibility estimates that over his seven years to 2027, an additional £43bn will be drained from taxpayers from drug effects alone.
This is a surprisingly large tax increase, but it is likely to be welcomed as it reflects the increase in people’s income. But this is the element of the tax system that best explains why taxes in all their forms continue to take the biggest bite out of national income since the 1950s.
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UK income tax gap widens significantly for middle-income earners and beyond
On the Isle of Holyroodhouse, we are proud that the Scottish Government has a more progressive income tax system than the rest of the UK. They say it reflects Scottish values, is part of the “social contract” and will help protect Scotland’s public service budget.
For the lowest income taxpayers, the benefit is only around £23. With a median full-time income of just under £29,000, Scots pay more income tax than other Brits with the same income have to pay.
At £50,000, the difference in tax on equal pay would be over £1,500. A police chief or head teacher earning £100,000 a year will pay £3,300 more in tax than the same salary south of the border, while a senior hospital consultant earning £130,000 will pay more than £5,000 in tax.
Applying this to the high salaries of lawyers and accountants in large global partnerships, a salary package of £700,000 would result in a £22,000 higher tax deduction than a partner with the same salary in London. Become.
There aren’t many such earners in Scotland. Only 40,000 people are expected to pay the top tax rate – 48p for every pound of income above £125,140 – next year.
This represents just 0.9% of Scottish taxpayers. In the rest of the UK, 2% of taxpayers pay the same tax rate as the top 45%, and last year taxpayers contributed around 39% of all income tax revenue.
People in the high or top rate of tax in Scotland pay around 65% of all income tax income.
That means it’s very important that these people continue to pay. However, the growing divergence between Scottish and UK income tax rates means there is more incentive not to pay Scottish tax rates.
Across national borders and even between U.S. states, people can go to the place with the lowest taxes, but often choose not to do so. What makes Scotland different from the rest of the UK is the ease with which people can move their taxable income between Scotland and the UK.
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Rising income tax rates are a deterrent to filling doctor vacancies in Scotland
Business owners can receive dividends in lieu of their salary. Tax on dividends is paid to the UK Treasury at UK tax rates.
There is an incentive to put more money into a pension fund to avoid income tax. People can leave Scotland and the wealthy can live elsewhere for more than half the year.
But perhaps more important is recruiting people into good-paying jobs in Scotland. A top hospital consultant can find similar salaries in Scotland and England, but Scottish tax will cost him £5,000 more. This is hampering NHS Scotland’s ability to fill vacancies.
Are there reliable measures of how these “behavioral effects” reduce tax revenues in response to relatively high tax rates? No, it is difficult to estimate. However, the Scottish Finance Committee is tasked with setting the parameters of the Scottish Government’s budget.
The report said that without such “behavioral effects”, the highest level of income tax increases in the new financial year would benefit the Scottish Government by around £200m. But even if people adapted to the different tax rates, the benefit is predicted to be only £82m.
A more progressive tax system could be politically prudent, but the estimated revenue loss of £118m shows the diminishing returns of taxing high earners. .
