Scotland has introduced a new tax threshold for high earners, significantly impacting individuals with an income above £75,000. This change means that those falling into this bracket will face a tax rate of 45%. Previously, Scotland already had the highest tax band in the UK, with a rate of 47% for individuals earning over £125,000. Furthermore, this top tax rate is set to increase by 1% next year, bringing it to 48%. These alterations have raised concerns about the impact on high earners and the competitiveness of the Scottish economy.
The introduction of the new tax band in Scotland has increased the number of income tax bands from three to six, creating a more complex tax system compared to the rest of the UK. The starter, basic, intermediate, and higher bands will remain frozen at 19%, 20%, 21%, and 42% respectively. However, the thresholds at which these bands become applicable have been subjected to inflation adjustments. Individuals earning over £100,000 will now pay an extra £3,346 in taxes, while those making more than £28,850 will have higher tax obligations compared to their counterparts in the rest of Britain.
The decision to implement these changes stems from the need to address a £1.5 billion budget deficit in Scotland. However, experts at the Fraser of Allander Institute (FAI) predict that the newly introduced tax band will only generate approximately £60 million for spending. Despite this, the Scottish Fiscal Commission estimates that overall income tax will contribute £18.8 billion to the economy in 2024-25. The aim is to strike a balance between generating revenue to fill the financial gap and preventing excessive burdens on high earners.
The introduction of the new tax threshold has implications for various sectors and services in Scotland.
Council Tax Freeze
The Scottish government has stated its commitment to fully funding a council tax freeze, providing local governments with the equivalent of a 5% rise in funding. This additional allocation of over £140 million aims to boost investment in local services. With overall funding for local governments set to increase by 6% since the last budget, this initiative will establish a record high funding of more than £14 billion.
School Meal Debt
To alleviate the burden on families struggling to make ends meet, the Scottish government has allocated £1.5 million to eliminate school meal debt incurred by pupils across Scotland. This move aims to address the concerns of families and ensure that children receive nutritious meals without any financial stress.
Scottish Child Payment
Ministers have pledged to invest £6.3 billion in social security benefits and announce a 6.7% increase in Scottish benefits in line with the Consumer Price Index (CPI) rate of inflation from September 2023. As part of this commitment, the Scottish Child Payment will increase from £25 to £26.70 starting in April.
NHS Funding
Funding for NHS boards in Scotland will receive a £550 million increase, equating to 4.3% growth. This investment, amounting to £13.2 billion, demonstrates the government’s determination to enhance service delivery and improve waiting times. With additional support for frontline services and essential priorities such as body-worn cameras, more than £1.5 billion will be allocated to Police Scotland. The Scottish Fire and Rescue Service will also receive over £400 million in funding.
Business Rates, Housing, and Transport
The government plans to freeze business rates for premises valued below £51,000. Furthermore, it aims to provide 100% relief for hospitality businesses in Scotland’s islands. In addition to this, there will be investments of nearly £2.5 billion in public transport and £550 million in affordable housing supply.
Limits of Mitigation and the Call for Independence
Shona Robison, deputy first minister and finance secretary, acknowledges that Scotland’s mitigation efforts are approaching their upper limit within the devolved settlement. However, she emphasizes the importance of financial constraints and the inability to mitigate all cuts made by the UK government. Robison argues that the choices made in this budget reflect Scotland’s values and prioritize impactful investments in public services and its people. While some may feel disappointed, she asserts that the government will always strive to make the best use of the powers available. At the same time, she emphasizes that these powers cannot replace the need for independence.
The budget has elicited mixed reactions, with several concerns and criticisms being raised.
Criticism from Scottish Conservatives
Liz Smith, finance and local government spokesperson for the Scottish Conservatives, has labeled the budget as “dismal and damaging” for taxpayers and businesses. She believes that Scotland was already burdened with the highest taxes in the UK and that the new income tax rise exacerbates this situation. Smith contends that an increased tax rate will deter the recruitment and retention of skilled workers, impacting sectors like healthcare.
Impact on Local Services
Unison, a public service workers’ union, asserts that the Scottish government’s council tax freeze will adversely affect local services. The freeze could hinder investment in public services, schools, and healthcare, hampering Scotland’s ability to meet the needs of its citizens effectively.
Disappointment in Scottish Child Payment
Action for Children expressed disappointment in the failure to meet the initial pledge of raising the Scottish Child Payment to £30. While acknowledging the increase to £26.70 as per the CPI, they stress the need for further progress to alleviate child poverty.
Scotland’s new tax threshold for high earners has sparked debate and raised concerns about its implications for individuals, businesses, and various sectors. While it aims to address budget deficits and generate revenue, critics argue that it may discourage skilled workers from settling in Scotland and affect the provision of local services. Balancing economic considerations with the needs of citizens will be crucial for Scotland’s future.
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