Scotland top-rate tax rises widen gap with rest of UK

The Scottish government has raised taxes for the highest earners in the country, widening the gap with the rest of the UK as it sought to raise revenues and offset the impact of surging inflation and increased wage settlements.

The pro-independence Scottish National party, which governs at Holyrood in co-operation with the Greens, stuck to a progressive tax system by keeping rates for lower-paid workers unchanged.

But in Thursday’s Budget, which was delayed after some details were leaked to the BBC, Scotland’s deputy first minister John Swinney reduced the level at which the highest tax rate is levied from £150,000 to £125,140.

The decision will pull more Scots into the top rate of tax and has matched a similar move by UK chancellor Jeremy Hunt when he presented his Autumn Statement in November.

Swinney set the top rate of tax at 47 per cent, up from 46 per cent and compared with 45 per cent in the rest of the UK. He also increased the higher-rate income tax band by one percentage point to 42 per cent.

“These tax decisions seek to strike a balance between ensuring there is enough money for public spending and acknowledging the challenging economic conditions facing households and businesses,” Swinney added.

The widening gap on the top rate of tax compared to England is likely to generate a modest increase in revenue as the country has fewer workers in the highest earnings bracket. It may also reignite a debate about whether higher rates of taxation will make Scotland a less appealing place to invest.

Prior to the budget, economists at the Fraser of Allander Institute, a think-tank at Strathclyde university, estimated that reducing the top rate threshold could raise just £40mn in extra revenue.

“One of the losers today is obviously the wealthiest in the Scottish population, and it will be interesting if this creates any behavioural responses as Scottish taxes continue to diverge,” said Alex Docherty, partner and head of private client tax at Johnston Carmichael.

Docherty added that prior to Thursday’s Budget, a middle-income earner in Scotland making £50,270 would pay £1,546 more than they would in the rest of the UK. From April, that will rise to £1,611.88, she said.

Swinney also announced a 50 per cent in increase in Scotland’s Additional Dwelling Supplement, a levy paid on additional homes as part of the country’s Land and Buildings Transaction Tax (LBTT), equivalent to stamp duty in England.

The move, which the Scottish government said would raise £34mn, prompted warnings that it will hurt the property market by penalising landlords and owners of second homes. Stewart Mathieson, head of tax at consultancy EY in Scotland, said that the tax rise “may well act as a barrier to those looking to invest in property”.

Meanwhile, Swinney said the Scottish government would divert £20mn set aside for another independence referendum towards a fuel insecurity fund set up to help vulnerable households struggling with energy bills.

The UK Supreme Court ruled last month that Scotland’s parliament did not have the authority to legislate for a plebiscite without the consent of Westminster.