Scottish income tax divergence could increase further

The CIOT has also highlighted that the prospect of UK income tax cuts in the spring means it is possible that income tax divergence may increase further in the New Year.

A table at the foot of this email compares the expected Scottish and UK income tax liabilities for 2024-25 and the differences within the Scottish income tax system between 2023-24 and 2024-25. These include:

• The point at which Scottish income taxpayers start to pay more income tax compared with the rest of the UK will increase from £27,850 to £28,867.
• The inflationary increases to the starter and basic rate bands mean Scots with earnings under £28,867 will pay up to £23.06 less tax than those in the rest of the UK.
• Introducing a 45 per cent rate of income tax on income between £75,000 and £125,140 will see Scots in this band pay up to £1,871.13 more than this year, and up to £5,231.81 more than someone on the same salary in other parts of the UK in 2024/25.
• Scottish taxpayers with income between £100,000 and £125,140 will pay an effective tax rate of 67.5 per cent on this slice of their income, as the tax-free personal allowance is withdrawn. This will be 69.5 per cent once National Insurance contributions are taken into account. The corresponding figures for the UK are 60 per cent (income tax) and 62 per cent (income tax and National Insurance).
• Increasing the top rate of tax to 48 per cent will increase the amount paid by the highest earners, as shown in the table below.
• Scots with income between the Scottish and UK higher rate thresholds will continue to pay a higher marginal rate of tax on this slice of income, compared to the rest of the UK. The marginal rate will be 2 per cent less in 2024/25 (52 per cent) as a result of the UK Government’s decision to cut National Insurance at the recent UK Autumn Statement.

Employees in Scotland will pay up to £566 less in National Insurance in 2024/25 compared with 2023/24 as a result of the Autumn Statement.

Should the UK Government announce income tax cuts in their expected March budget, the Scottish Government will need to decide whether to respond. This could potentially require a new set of income tax plans to be agreed in advance of the start of the new tax year. This scenario would leave MSPs in a race against time to revisit today’s tax proposals ahead of 6 April.

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

“The Scottish Government’s income tax plans increase divergence between higher earners in Scotland and the rest of the UK and we cannot rule out the possibility that divergence could widen further in the spring.

“A sixth income tax band will inevitably mean further complications for affected taxpayers. That can include difficulties in knowing when different rates of income tax apply and how to ensure that the appropriate amount of tax relief is applied to things like Gift Aid and pension contributions.

“The fact that income tax rates and bands for savings income and dividends remain reserved to the UK Parliament continues to mean a disjointed approach for Scottish residents, making it more difficult for Scottish taxpayers to easily understand their tax affairs where different sources of income are taxed differently.”

On the potential implications of UK income tax cuts in the spring, Sean Cockburn added:

“The first minister has said that the Scottish Government needs to be mindful of the behavioural impacts of further income tax divergence, so the prospect of spring UK income tax cuts is a factor that remains on the table.

“Behavioural changes can include someone deciding to work a little less, pay a bit more into their pension, incorporating a business or, at its most extreme, choosing to relocate from or deciding against moving into Scotland.

“If the Scottish Government felt that it needed to respond to such a UK income tax cut via the devolved tax system, it would need to bring back a new set of tax plans for agreement before 6 April.

“This is because the Scottish Parliament has to agree its income tax plans before the start of the new tax year and then stick with them. The UK Parliament has an advantage in that it can announce rates but does not need to pass the relevant legislation until a few months later.

“It raises the possibility that MSPs will be left in a race against time to agree the Budget, a scenario that would be far from ideal and one that cannot be definitively ruled out for the time being.”

Notes

The CIOT’s tax tables can be found here:

Comparison of rUK and Scotland for 2024/25 and Scotland 2023/24 with Scotland 2024/25

Income tax

	2023/24	2024/25	2024/25	Difference	Difference
Earnings	Scottish Income Tax	UK Income Tax	Scottish Income Tax	Scotland vs rUK 2024/25	Scotland 23/24 vs 24/25
£	£	£	£	£	£
10,000	0	0	0	0	0
15,000	464	486	463	23.06	1.44
20,000	1,464	1,486	1,463	23.06	1.44
25,000	2,464	2,486	2,463	23.06	1.44
28,867	3,270	3,259	3,259	0.00	10.17
35,000	4,558	4,486	4,547	-61.33	10.17
40,000	5,608	5,486	5,597	-111.33	10.17
45,000	6,938	6,486	6,928	-442.31	10.17
50,000	9,038	7,486	9,028	-1,542.31	10.17
55,000	11,138	9,432	11,128	-1,696.31	10.17
60,000	13,238	11,432	13,228	-1,796.31	10.17
65,000	15,338	13,432	15,328	-1,896.31	10.17
70,000	17,438	15,432	17,428	-1,996.31	10.17
75,000	19,538	17,432	19,528	-2,096.31	10.17
80,000	21,638	19,432	21,778	-2,346.31	-139.83
85,000	23,738	21,432	24,028	-2,596.31	-289.83
90,000	25,838	23,432	26,278	-2,846.31	-439.83
95,000	27,938	25,432	28,528	-3,096.31	-589.83
100,000	30,038	27,432	30,778	-3,346.31	-739.83
125,140	45,877	42,516	47,748	-5,231.81	-1,871.13
150,000	57,561	53,703	59,681	-5,977.61	-2,119.73
175,000	69,311	64,953	71,681	-6,727.61	-2,369.73
200,000	81,061	76,203	83,681	-7,477.61	-2,619.73
250,000	104,561	98,703	107,681	-8,977.61	-3,119.73
300,000	128,061	121,203	131,681	-10,477.61	-3,619.73
500,000	222,061	211,203	227,681	-16,477.61	-5,619.73
1,000,000	457,061	436,203	467,681	-31,477.61	-10,619.73

rUK refers to England, Wales and Northern Ireland. Although Wales can set its own rate of income tax, it has retained parity with England.