• Date

    20 Dec 2023
  • Category

    Tax

Scottish Budget targets higher earners with introduction of new advanced rate for income tax

Prior to yesterday’s (19 December) Scottish Budget, the Finance Secretary, Shona Robison, made it clear that the country faces “a deeply challenging financial situation”. This coincided with the news of a £1.5 billion shortfall in Scotland’s budget for 2024/25.

In a bid to bring in more revenue, it was reported that First Minster Humza Yousaf would introduce a new tax bracket for higher earners. Also, while limited on what fiscal changes she can make, it was predicted that business support wouldn’t be a focal point of the Finance Secretary’s statement.

Here, we summarise what was announced.

 

Income tax

  • No changes were made to starter, basic, intermediate and higher rates. These will stay at 19%, 20%, 21% and 42% respectively
  • The bands, however, for starter (to be £14,876) and basic (to be £26,561) will be increased by inflation
  • A new income tax band has been added and set at 45%. This ‘advanced rate’ will apply on incomes between £75,001 and £125,140
  • The top rate of tax to be increased by 1 to 48%

Updated Scottish income tax rates and bands for 2024/25:

Taxable income

Band

Tax rate

£12,571* to £14,876

Starter rate

19%

£14,877 to £26,561

Scottish basic rate

20%

£26,562 to £43,662

Intermediate rate

21%

£43,663 to £75,000

Higher rate

42%

£75,001 to £125,140**

Advanced rate

45%

Above £125,140

Top rate

48%

*Assumes individuals are in receipt of the standard Personal Allowance.
**Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

 

The impact on higher earners

For those people who lose their personal allowance on income over £100,000, there is set to be an effective rate of tax of 67.5% from April 2024. This has increased significantly over recent years. When we had a higher rate tax bracket of 40% (April 2018), the effective rate was 60%.

The following highlights the differences between tax paid by a Scottish resident compared to rest of UK:

£4,854.92 more paid in Scotland on earnings over £125,140
£5,600.72 more paid in Scotland on earnings over £150,000

Given the increase in rates, we are likely to see people who are actively moving out of Scotland and establishing themselves as rest of the UK taxpayers. In times of high tax rates, people look to try and mitigate their liabilities, and therefore we need to be very careful about the rise of ‘schemes’ to avoid the increased liabilities. If something looks too good to be true, it usually is.

 

Pension planning

Another route to consider in the wake of the income tax announcement is the level of pension contributions you’re making. It may, in some circumstances, make financial sense to increase your contributions, but a specialist should be engaged prior to taking this action. Our Wealth Management team are on hand to support with optimising your pension pot.

 

Business rates

For businesses with a rateable value up to and including £51,000, the poundage on Basic Property Rate to be frozen at 49.8p.

 

Related considerations

It’s important to highlight that the majority of announcements within last month’s UK Autumn Statement are also applicable in Scotland. These include a 2% cut to Class 1 employees’ National Insurance, a simplified research & development (R&D) tax relief and full expensing for qualifying plant & machinery being made permanent. The UK Autumn Statement summary can be viewed here.

The changes to income tax alongside the impending National Insurance contribution cut for employees are likely to place a strain on payroll teams over the coming months. Businesses need to ensure their payroll software – where necessary – is updated to reflect any changes. In the case of the NIC cut, where systems are not ready ahead of the first payday after 6 January, employers will need to make retrospective adjustments as soon as possible.

 

Our personal tax planning guide

Our personal tax planning guide explores the different tax-saving options available, profiling different measures that you should consider. With some individuals based in Scotland facing higher income tax charges from next year, now is the time to act to potentially reduce your tax liability and negate any impact of this increase.

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We are here to help

If you have any questions on the announcements, or the possible impact on you or your business, please get in touch with your usual Azets advisor or a member of our specialist team.

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