It’s that time of year when panto dames are in full swing, entertaining audiences throughout the country, but in Scotland an 'aw na' concern for many taxpayers in Scotland will be that of fiscal drag caused by the Scottish Government's latest Budget. In addition to a new tax band (called the Advanced rate) of 45% covering those earning between £75,000 and £125,140 and an increase in the top rate of tax to 48%, the freezing of the higher rate band is expected to see a further 62,000 people start to pay higher rate tax in Scotland. This is what is known as a fiscal drag and in Scottish terms is a ’sleekit’ way of increasing tax rates.
Given the promises and commitments already made by the Scottish Government, it was acknowledged that money had to be found from somewhere. Whilst it may not make people actually leave Scotland, for many Scottish based companies looking to attract staff it will undoubtedly make an already difficult position even more challenging. As most employers know, it is a competitive world out there when it comes to staff recruitment and the divergence in income tax rates between Scotland and the rest of the UK, where a top rate taxpayer will be on average worse off to the tune of £5,200 compared to the rest of the UK, will not help.
Further, the marginal tax rate on those earning between £100,000 and £125,140, where there is a tapering of the personal allowance from £12,570 to nil, results in a marginal tax rate of 69.5%. None of these announcements are welcome Christmas presents.
There are though winners and for those taxpayers earning £29,000 or less, they will be £10 a year better off as the starter, basic and intermediate rate thresholds all increased by the rate of inflation.
What is likely to happen for those facing the larger tax increases is that ‘behavioural changes’ will take place though working less, looking at more tax efficient forms of remuneration or investing in tax efficient arrangements such as pensions, so it remains to be seen if the tax increases will raise the amounts expected.
A major disappointment was undoubtedly the lack of measures announced to support business growth. Leaving aside the difficulties in attracting talent to companies, there was further divergence with no matching of the reduction in business rates announced in the Autumn Statement except for those on the islands (which is certainly welcome there). This was a particular blow for the hospitality and retail sectors which were of course hugely hit during the pandemic and have subsequently struggled to recover.
The lack of willingness to help the business world in Scotland will, in our view, continue to make Scotland a less attractive place for companies to invest and reduce the opportunity for growing the economy. Some may shout “oh no it’s not” and we would certainly like to be proved wrong but we can’t see how the measures announced will in any away help the Scottish business community.
A summary of the proposed tax rates for the 2024/25 tax year can be found here.
| Rest of UK | Scotland | |||
| Personal allowance | £12,570 | £12,570 | ||
| Starter Rate | - | - | 19% | Up to £14,732 |
| Basic Rate | 20% | Up to £37,700 | 20% | Up to £25,688 |
| Intermediate Rate | - | - | 21% | Up to £43,662 |
| Higher Rate | 40% | Up to £125,140 | 42% | Up to £125,140 |
| Additional Rate | 45% | Over £125,140 | 47% | Over £125,140 |
