The Scottish Government said it plans to make changes to a number of devolved taxes to “raise additional revenue to support Scotland’s NHS and other public services” as part of its Scottish Budget 2023-24.

Deputy First Minister John Swinney unveiled plans to add 1% to the “Higher” and “Top” tax rates, while maintaining the “Starter” and “Basic Rate” bands at their current level.

The higher rate of income tax will rise to 42% from 41% for those with an income above £43,663 and to 47% from 46% for people earning £125,140 or more.

The threshold at which people pay the 47% top rate will be reduced from £150,000 to £125,140.

Swinney said the majority of people in Scotland will still be paying less in taxation than if they lived in the rest of the UK.

The Fraser of Allander Institute said those paying the higher rate of tax are among the 20% top-earning taxpayers in Scotland.

The Chartered Institute of Taxation (CIOT) said 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.

The CIOT said 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 tax on this level of income than someone on the same salary in other parts of the UK from April, the CIOT said.

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, the CIOT said.

“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,” said Swinney.

“The Income Tax proposals I have put forward will enhance the Scottish Government’s progressive approach to tax.

“Using the additional revenue raised through our tax changes will allow us to make a £1 billion uplift to the NHS budget, above and beyond the frontline health consequentials we have received from the UK Government.

“At the same time, the majority of people in Scotland will still be paying less in taxation than if they lived in the rest of the UK.

“On non-domestic rates, we have listened to businesses and by freezing the poundage we will deliver the lowest poundage in the UK for the fifth year in a row.

“This will ensure over 95% of non-domestic properties continue to be liable for a lower property tax rate than anywhere else in the UK.

“Increasing the tax due on the purchase of additional dwellings such as second homes maintains our commitment to protect housing opportunities for first-time buyers in Scotland, while also raising vital extra revenue.”

REACTION:

Sean Cockburn, Chair of the Chartered Institute of Taxation’s Scottish Technical Committee: “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 …

“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.”

Vishal Chopra, KPMG UK’s Head of Tax in Scotland: “Ahead of this budget, interim finance secretary John Swinney had some difficult decisions to make against a turbulent economic backdrop.

“If he wanted to inject stability in public finances and give additional support to certain sectors and households, tax increases, and spending cuts were inevitable.

“To combat the cost-of-living crisis, higher earners were chosen to shoulder more of the tax burden. As expected, Mr Swinney followed Westminster by reducing the threshold at which Scottish taxpayers start to pay the top rate of tax from £150,000 to £125,140.

“Mr Swinney also increased the higher rate of tax from 41p to 42p in the pound and the top rate from 46p to 47p, further increasing the disparity with taxpayers South of the border.

“Starter, basic and intermediate, and higher income tax thresholds have also been frozen in line with Westminster, which effectively means a tax increase for many as they enter the higher tax bands as their salaries rise – although this will impact all taxpayers, not just the highest earners.

“This budget also addressed the obvious challenges for business to create employment opportunities and growth by freezing business rates at 22/23 levels and extending the Small Business Bonus – moves which will be welcomed, especially by those in the hardest hit sectors.

“Landlords, property investors, and second homeowners will also pay more tax with the LBTT additional dwelling supplement set to increase from four per cent to six per cent.

“This Scottish budget, delivered during a veritable winter of discontent, was all about preparing for even harder days ahead. With Christmas fast approaching, Mr Swinney will have hoped to spread universal cheer, but given the hard decisions he had to make, pleasing everyone this festive season was always going to be an impossible task.”

David Phillips, an Associate Director at the UK’s Institute for Fiscal Studies: “The Scottish Government has further raised tax rates on high earners relative to the rest of the UK, continuing a trend of higher, more progressive taxes.

“The revenues raised – estimated at around £95 million, on top of the £8 million from following the UK government’s decision to reduce the threshold at which people start paying the 45p additional rate of income tax – are not to be sniffed at but are small in the context of its budget and cost pressures. The higher tax rates would, for example, cover Scottish NHS spending for only around 48 hours.

“The main reasons why the funding outlook for the coming year is a little less bad than may have been expected this time last month is the extra funding announced in the UK Government’s Autumn Statement, and an upgrade in the Scottish Fiscal Commission’s forecasts for tax revenues relative to the rest of the UK.

“But funding for public services is still set to be cut overall in real-terms, and by more than in England and Wales. For some services outside the NHS these cuts will be substantial. In the context of obvious pressures on many public services and disputes with public sector workers over pay, these plans may be hard to deliver.

“The main reason why more services are facing cuts than elsewhere in the UK is that the Scottish Fiscal Commission expects Scotland’s growing range of devolved benefits to eat into a bigger share of its budget. Extra spending on benefits will help tackle child poverty and support more disabled people but will mean less for public services.

“The way the devolved governments are funded – and particular the Barnett formula – is also delivering smaller percentage increases in funding for Scotland than in England, an issue that we’ll be looking at in more detail in the New Year.”

Susan Love, head of the Association of Chartered Certified Accountants (ACCA) in Scotland: “The tax and spending plans unveiled by the Scottish Government, provided few surprises, if little Christmas cheer, for businesses and households across Scotland.

“Most of the tax announcements will not have come as a huge shock, especially given recent tax rises announced by the Chancellor. However, while difficult choices had to be made, many firms will worry about further eroding the spending power of consumers.

“While we welcome the clarity provided by the Scottish Government about its spending priorities, we need to see extra revenue raised supporting investment in our economy. Lack of access to skilled people remains the overarching challenge for our economy, so boosting investment in skills and employability has to be central to recovery and growth.

“On business rates, with the revaluation taking effect from April 2023, businesses will be relieved that the Deputy First Minister has listened to calls to freeze the poundage rate and maintain the vital Small Business Bonus Scheme.

“Yet with interest rates going up again and inflation still in double figures, the pressures facing business continue to grow. Many firms would have been hoping to hear more about what the Scottish Government would do to help lighten the load.”

David Ovens, Joint Managing Director of Archangels: “We understand the rationale behind increasing the tax burden on higher earners in Scotland.

“However, the practical implications require more consideration. By creating such a large differential between Scotland and the rest of the UK, we run the risk of a brain drain.

“Scotland’s thriving tech sector employs highly skilled people and founders who are generally mobile, and such a system is likely to result in many relocating elsewhere within the UK.

“In recent years, Scotland has made great strides to establish a reputation for supporting and nurturing entrepreneurs.

“We just need to be careful that we are not creating a fiscal environment which hinders entrepreneurial activity and damages our reputation as a place to start and grow a successful business.”

Liz Cameron, Chief Executive, Scottish Chambers of Commerce: “The specific decision by the Scottish Government to widen the divergence on income tax rates between Scotland and the rest of the UK is exceptionally concerning.

“Many will be left pondering today as to who in the Scottish and UK Governments is standing up for the economy to help businesses survive this crisis and keep people in jobs …

“The Scottish Government’s move to increase the top and higher rates of income tax will hit taxpayers in Scotland more than other parts of the UK.

“This is a clear disadvantage for Scotland’s businesses and workers and could position Scotland as a less attractive place to live and work.

“With over 350,000 people alone in the higher rate bracket, questions remain on the impact this will have on talent attraction, retention, consumer confidence and indeed departure of workers to other parts of the UK.

“We urge the Scottish Government to publish its economic modelling of this policy decision, specifically on the proposed impact this could have on future investment decisions by companies …

“As a priority ask from the business community, we welcome the Scottish Government’s decision to freeze the poundage rate and align with the rest of the UK. This will provide relief to ratepayers by reducing the upfront cost burden of non-domestic rates.

“This was the right decision as is the incentive for businesses to invest in greener plant and machinery which supports net-zero and decarbonisation.

“Looking ahead, businesses need to see widespread reform to the business rates system ensuring it is fit for purpose and aligns with the economic reality that businesses operate in.”

Emma Congreve, Deputy Director of the Fraser of Allander Institute at the University of Strathclyde: “John Swinney faced a number of difficult choices today, even with the additional funding from UK Government as a result of the Autumn Statement.

“It is alarming that the Scottish Government are still in a position of trying to balance this years’ budget, and the Scottish Fiscal Commission (SFC) notes that the balance for 2023-24 is also likely to be difficult.

“The Scottish Government has delayed any announcement on public sector pay. We will have to wait and see what agreements take place here, and whether there is enough fiscal headroom left in the budget to cover demands …

“Given the pressures on government spending, a decision to raise more income from higher earners is understandable, if a little unexpected. Overall it will raise more money for the Scottish Government to spend on the priorities laid out today.

“Only those with relatively high incomes will be affected – for example, those paying the higher rate are among the 20% top-earning taxpayers in Scotland.

“There has been a large improvement in the income tax net position, driven by forecast higher earnings growth in Scotland than the rest of the UK. This switch in fortunes, from a negative position in the May 2022 SFC forecast to a positive position here will have come as a relief to the interim Finance Secretary …

“Council tax is a regressive tax with people on middle incomes paying more than those on higher incomes. It’s regrettable that the Scottish Government have signalled that local authorities can increase council tax without committing to reform.”