Scotland’s decision to increase income taxes on high earners may have led to reduced revenues, though there remains significant uncertainty around the full extent of its effects. As the country gears up for its 2025–26 Budget, the debate over the impact of these tax hikes has never been more pressing.
The Scottish Government has long pursued a policy of higher taxes for those with above-average incomes, aiming to generate more revenue and promote a more progressive tax system. But as income tax rates climb, so too does the risk of tax avoidance and potential migration, as some high earners look for ways to reduce their liabilities or move elsewhere.
Scotland’s Tax Rate Changes and Their Complexity
Since the Scottish Government gained the ability to set its own income tax rates in 2017, it has made several notable changes. The most significant increases occurred in 2018 when Scotland introduced a new set of tax bands that included starter, basic, intermediate, higher, and top rates. For the wealthiest earners, rates jumped to 46% and then 47%, with the government introducing further increases in 2023 and 2024.
This tax hike strategy has led to a more complex income tax system, particularly for higher earners. As the rates now range from 19% to 48%, people earning more than £26,562 face higher taxes than those in the rest of the UK (rUK). The question remains: have these complex changes helped or hurt Scotland’s revenue?
The impact of these tax increases is difficult to gauge due to multiple factors, but it’s clear that those with higher incomes in Scotland pay significantly more than their counterparts elsewhere in the UK. For instance, a taxpayer earning £50,000 pays £1,540 more in Scotland than in rUK, and someone with a £100,000 income will pay an additional £3,346.
Increases in the top rate of tax, especially for high-income earners near the £125,000 threshold, are also noteworthy. A person earning £125,000 now pays £5,221 more in tax than they would if they lived in rUK. This increase amounts to a 7% reduction in their after-tax income—up from 2% in 2018.
Concerns Over Tax Avoidance and Migration
While the Scottish Government aims to balance its budget by targeting wealthier residents with these higher tax rates, there is growing concern over the potential for tax avoidance and even migration. As the tax burden on higher earners increases, some are seeking ways to reduce their liabilities, including through tax avoidance schemes, while others are considering moving to lower-tax regions.
The Scottish Government’s tax strategy and future tax policy decisions will need to address these issues, considering both the revenue needs of the country and the potential social and economic costs. The fear is that continued increases in income tax could spur more high-income individuals to relocate, reducing the tax base and ultimately harming the very revenue goals the government is trying to achieve.
The Risk of Migration
The idea that people might leave Scotland to avoid higher taxes is not merely theoretical. There are already signs of migration from Scotland to other parts of the UK, where the tax burden is lighter. For many high-income earners, especially those in sectors like finance, tech, and business, the move to a more tax-friendly region could seem like an easy choice, especially if it offers a better quality of life.
Interestingly, Scotland’s relatively small population and high levels of dependence on high earners for tax revenue create a unique challenge. A small outflow of wealthy residents could have a disproportionate impact on the country’s finances.
Possible Solutions and Alternatives
To prevent further migration and tax avoidance, some economists suggest that the Scottish Government may need to rethink its approach to taxation. One suggestion is to simplify the current tax system, making it more transparent and less complicated. There is also the possibility of adjusting the tax bands to better reflect the reality of living in Scotland and to ensure that the tax system remains competitive with other regions in the UK.
A reduction in the number of bands could also alleviate the burden on middle and higher-income earners who are currently facing significant increases in their tax liabilities. By making the system less complex, Scotland could reduce the likelihood of avoidance and potentially improve the overall perception of the tax system.
Moreover, there is also the option to introduce measures that encourage wealthy individuals to stay in the country, such as targeted tax relief for certain sectors or for individuals who contribute to local economic growth. This strategy could ensure that higher earners continue to make meaningful contributions to Scotland’s economy without feeling penalized for their success.
| Taxpayer Income | Tax Paid in Scotland | Tax Paid in rUK | Difference in Tax Liability | Percentage Increase |
|---|---|---|---|---|
| £25,000 | £23 | £23 | £0 | 0% |
| £50,000 | £1,540 | £0 | £1,540 | 3.1% |
| £100,000 | £3,346 | £0 | £3,346 | 3.3% |
| £125,000 | £5,221 | £0 | £5,221 | 7% |
Financial Uncertainty Ahead
Looking ahead to next month’s Scottish Budget, the government will need to weigh the success of its higher tax strategy against the realities of tax avoidance and migration. The decision to maintain or adjust the current approach will be a balancing act. If taxes remain high for the wealthy, the risk of further economic consequences could grow. On the other hand, reducing taxes might undermine Scotland’s ability to meet its financial goals.
In any case, the debate around Scotland’s income tax rates is far from settled. As more data becomes available, policymakers will have to carefully assess the long-term impact of these tax changes on both the economy and the public perception of fairness in the system.
