Income tax divergence entrenched after today’s Scottish Budget

The Chartered Institute of Taxation has looked at the impact of the changes announced by Interim Finance Secretary John Swinney that will take effect from April. Some of the key points to note are:

• Scots with earnings under £27,850 will pay a maximum of £21.62 less tax than someone in the rest of the UK next year as a result of the 19p Scottish starter rate of tax. This break-even point is the same as this year (2022/23). It also means that the level of income at which Scots start to pay more income tax compared with the rest of the UK has remained the same.
• Increasing the higher rate of Scottish Income Tax to 42p means that someone earning £50,000 next year will pay an extra £63.38 in tax compared with this year. They will pay £1,552.48 per year more on this level of income than someone on the same salary in other parts of the UK from April.
• Lowering the top rate threshold to £125,140 and increasing the rate to 47p means that Scots with earnings of £150,000 (the previous top rate threshold) will pay an additional £2,432.08 compared to this year. They will pay an extra £3,857.88 compared with someone earning the same salary elsewhere in the UK.

A tax table is provided at the foot of this email comparing expected Scottish and UK income tax liabilities for 2023-24 and the differences within the Scottish income tax system from 2022-23 to 2023-24.

Commenting, Sean Cockburn, Chair of the CIOT’s Scottish Technical Committee, said:

“This is an income tax plan that goes further than the measures set out by the UK Chancellor earlier this Autumn and further entrenches the divergence between the income tax regimes in Scotland and the rest of the UK.

“The cumulative effects of five years of divergence mean that the Scottish income tax system continues to be more generous to those on lower incomes, but increasingly less so to those with higher incomes.

“Increasing the higher rate to 42p also means that those with earnings that fall between the Scottish and UK higher rate tax thresholds of £43,662 and £50,270 will be taxed at a marginal rate of 54% on that slice of income, compared with 32% in the rest of the UK. That is because National Insurance rates are tied to the UK, not Scottish, higher rate.

Sean Cockburn continued:

“While the levels of divergence created by devolution have until now not led to any noticeable behavioural changes, the additional changes put forward today may yet prompt those who can, to consider whether they can legitimately lower their liabilities.

“This doesn’t need to be as extreme as choosing to up sticks and leave Scotland. Especially for those with earnings around the margins of the tax thresholds, it might mean working a bit less, incorporating a business or paying a bit more into their pensions.

“This was never going to be a budget of easy choices and the Finance Secretary’s proposals have confirmed that.”