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The Scottish government has raised income tax rates for higher earners, widening the gap between what is paid by better-off Scots and by their counterparts in the rest of the UK.
Shona Robison, the ruling Scottish National Party’s finance secretary, on Tuesday used tax raising powers handed to the Holyrood government in 2016 to announce a new 45 per cent income tax band for people earning between £75,000 and £125,140 a year.
The top rate of tax paid by those earning above £125,140 will also rise from 47 per cent to 48 per cent from April 2024. A 42 per cent rate will remain in place for those earning between £43,633 and £75,000 — and the £43,633 threshold will be frozen.
In the rest of the UK, a higher rate of 40 per cent currently applies on income between £50,271 and £125,140, with earnings above that taxed at 45 per cent.
The Scottish Fiscal Commission (SFC), the spending watchdog said that the full package of policy announcements in Robison’s 2024-25 budget would raise an additional £82mn in income tax receipts next year.
The SNP said the tax increases were needed to help fund health service spending and to compensate for a freeze in local council taxes it has imposed. It blamed the Conservative government at Westminster for a real-terms cut in funding it receives from the UK government.
As a result, Scottish residents earning above £26,561 will pay more in income tax than those in the rest of the UK, according to the SFC.
The watchdog said policy changes since 2017 meant that a person earning £100,000 a year would now pay £3,346 more in income tax than they would in the rest of the UK. Those on £50,000 would pay £1,542 more.
Robison said there would be no change to the tax rates for low and middle income earners, and that the government would widen the current tax band for starter, basic and intermediate earners in line with inflation. Scotland will have six income tax bands, compared to three currently for the rest of the UK.
She told MSPs that UK chancellor Jeremy Hunt’s Autumn Statement last month had represented a “worst-case scenario” for Scotland and that the UK government had “prioritised tax cuts at the expense of public services”.
She said the block grant — money transferred by UK government to Scotland each year to fund public services — had fallen by 1.2 per cent in real terms since 2022-23.
The Fraser of Allander Institute (FAI), a think-tank, has previously estimated that Scotland would face a £1.5bn shortfall next year due to “increased spending pressures”.
The FAI said the decision to raise tax bands meant that thresholds for basic and intermediate earners would increase by below inflation at 1 and 3.4 per cent, meaning more people would be brought into the tax system, in a process known as fiscal drag.
Robison said the government would fully fund a council tax freeze announced by first minister Humza Yousaf at the Scottish National Party’s annual conference in October by increasing funding for local services by £140mn next year.
The FAI previously estimated that the freeze would cost local authorities £300mn next year. Cosla, the local authority umbrella group, said that it would consider the announcement at a “special meeting” on Thursday.