Scottish Budget

Business dismayed as tax rises for higher earners

Shona Robison delivering the Scottish Budget

Scotland’s higher earners will pay more income tax from next year, widening the gulf between Scotland and England and against warnings that it will be damaging to the economy.

Finance Secretary Shona Robison confirmed in the Scottish Budget that a new 45p tax band will be created for those earning between £75,000 and £125,140. The top rate of tax for the highest earners is increasing from 47p to 48p. These policies affect the top 5% of taxpayers in Scotland.

The threshold for the starter and basic rate will be increased by inflation, she said, but the band for paying the higher rate tax (42p) will be kept at £43,662. Freezing the higher rate threshold next year will add an estimated £307m to income tax.

Sean Cockburn, chair of the Chartered Institute of Taxation’s Scottish Technical Committee, noted that the UK Government may introduce tax cuts in the next budget which have implications for Holyrood’s plans to raise taxes.

“The Scottish Government’s income tax plans increase divergence between higher earners in Scotland and the rest of the UK and we cannot rule out the possibility that divergence could widen further in the spring,” he said.

Ms Robison said: “We are proud that Scotland has the most progressive income tax system in the UK, protecting those who earn less and asking those who earn more to contribute more.

“This in turn allows us to provide a more comprehensive set of services than in the rest of the UK.”

The Scottish Fiscal Commission said changes to income tax policy since 2017 mean someone in Scotland earning £100,000 will now pay £3,346 more in income tax than they would in the rest of the UK.

Ms Robison said business rates and council taxes will be frozen, with the latter offset by an additional £140m. But the call for help for the hospitality sector was not forthcoming, in particular the 75% rates relief afforded to businesses in England.

In a joint statement, the Scottish Tourism Alliance, UKHospitality Scotland, the Scottish Licensed Trade Association and the Scottish Beer and Pub Association said: “The Scottish Government has squandered a golden opportunity to support one of the country’s most important sectors for the second year in a row.

“It is now immeasurably harder to run a hospitality, leisure or tourism business in Scotland, than anywhere else in Britain. This is particularly highlighted by the decision not to support the sector with rates relief, at a time when pubs in Scotland are already closing at twice the rate of those in England.”

Referencing Westminster or the UK Government directly at least half a dozen times, Ms Robison told MSPs: “We’re fighting Westminster austerity with one hand tied behind our back” and claimed that “last month’s Autumn Statement was a worst case scenario for Scotland.”

The block grant has fallen by 1.2% in real terms since 2022/23, she said as she confirmed the income tax changes that will generate an additional £700 million in funding for the 2024-25 budget than was expected this time last year and help plug the £1.5bn black hole in the public finances.

“We will freeze the poundage on the basic property rates, protecting businesses with a rateable value up to and including £51,000 from the impact of inflation by freezing the poundage,” said Ms Robison, adding that it will save ratepayers £37m and ensure that Scotland has the lowest rate for all but the largest properties for the sixth year in a row.

“In this budget we’ll maintain the Small Business Bonus Scheme ensuring that 100,000 properties are taken out of rates altogether.”

The next phase of the dualling of the A9 will be progressed and there will be a statement on the A9 in Holyrood tomorrow.

Bruce Cartwright, chief executive at accountancy body ICAS, said: “The Scottish government’s budget is both short sighted and fails to drive sustained economic growth.

“We continue to call for a five-year roadmap for growing the economy which would also give Scottish businesses some reassurance and stability – something we know they want to see.

Bruce Cartwright
Bruce Cartwright: budget is short-sighted

“Implementing further tax increases on higher earners is not a long-term sustainable solution and will have a negative impact on positioning Scotland as an attractive place to live and do business.

“Scotland already has five of the highest tax bands in the UK, and these changes will impact the growth of the Scottish economy, while only covering 5.4% of the budget deficit.  

“Additional tax bands introduce more complexity into an already overcomplicated tax system. We have called for tax simplification for many years to make it easier for taxpayers to understand and engage with the system.

“A complex tax system drives up costs for both taxpayers and businesses, and we urge devolved governments to work closely with the UK government when designing devolved or new taxes to make sure that tax is kept as streamlined and simple as possible.”

Scottish Labour finance spokesperson Michael Marra has called it a “chaotic budget from an incompetent government” that will leave ordinary Scots paying more and getting less in return.

“The SNP’s mismanagement of our public finances has left us with a massive gap to be filled – that is an SNP waste gap, an SNP incompetence gap and a huge SNP growth gap.

“If our economy had kept pace with other parts of the UK it would now be £8.5bn larger.”

What do the changes mean?

Scotland now has six tax bands

STARTER RATE (19%) £12,571 – £14,876

BASIC RATE (20%) £14,877 – £26,561

INTERMEDIATE RATE (21%) £26,562 – £43,662

HIGHER RATE (42%) £43,663 – £75,000

ADVANCED RATE (45%) £75,001 – £125,140

TOP RATE (48%) Above £125,140

The Chartered Institute of Taxation says:

* The point at which Scottish income taxpayers start to pay more income tax compared with the rest of the UK will increase from £27,850 to £28,867.

*The inflationary increases to the starter and basic rate bands mean Scots with earnings under £28,867 will pay up to £23.06 less tax than those in the rest of the UK.

* Introducing a 45% rate of income tax on income between £75,000 and £125,140 will see Scots in this band pay up to £1,871.13 more than this year, and up to £5,231.81 more than someone on the same salary in other parts of the UK in 2024/25.

* Scottish taxpayers with income between £100,000 and £125,140 will pay an effective tax rate of 67.5% on this slice of their income, as the tax-free personal allowance is withdrawn. This will be 69.5% once National Insurance contributions are taken into account. The corresponding figures for the UK are 60% (income tax) and 62% (income tax and National Insurance).

* Increasing the top rate of tax to 48% will increase the amount paid by the highest earners, as shown in the table below.

* Scots with income between the Scottish and UK higher rate thresholds will continue to pay a higher marginal rate of tax on this slice of income, compared to the rest of the UK. The marginal rate will be 2% less in 2024/25 (52 per cent) as a result of the UK Government’s decision to cut National Insurance at the recent UK Autumn Statement.

Employees in Scotland will pay up to £566 less in National Insurance in 2024/25 compared with 2023/24 as a result of the Autumn Statement

Business rates

On business rates, Ms Robison said: “The support I have outlined for businesses is estimated to be worth £685 million this year and ensures that over 95% of non-domestic properties continue to be liable for a lower property tax rate than anywhere else in the UK.”

She announced plans to:

* Freeze the non-domestic rates poundage at 49.8 pence, delivering the lowest poundage rate in the UK for the sixth year in a row. The Intermediate Property Rate and Higher Property Rate will rise in line with inflation to 54.5 pence and 55.9 pence respectively

* Offer 100% rates relief for hospitality businesses in island communities, capped at £110,000 per business

* Maintain existing Land and Buildings Transaction Tax (LBTT) rates and bands at their current levels. Relief allowing first-time buyers to claim a reduction in the amount of LBTT they need to pay will continue

* Increase the standard and lower rates of Scottish Landfill Tax to continue to support Scotland’s circular economy ambitions, while ensuring these do not encourage cross-border movement of waste

Comment: Budget puts brake on Scottish growth

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