Scottish Budget 2023: income tax hikes

Scottish Income Tax

Whilst there was no repeat of last year’s outright leak of the Finance Secretary’s statement, the key proposal had been widely speculated in the days before the Budget. Scottish taxpayers already face the highest income tax rates in the UK and the introduction of a new 45% ‘Advanced rate’ from 6 April on income between £75,000 and £125,140 will be a sore point. Someone earning £100,000 is now set to pay £3,346 more in tax than someone earning the same amount south of the border, up from £2,606 before the announcement of the new rate.

For those earning more than £100,000, the position will be even worse with an effective rate of 67.5% on incomes between £100,000 to £125,140 due to the erosion of the personal allowance in this bracket, or 69.5% including the 2% National Insurance Contribution, compared to 60% and 62% in the rest of the UK.

The Scottish Government is also increasing the top rate of tax, which applies to income above £125,140, to 48% - up from 47% and compared to 45% down south.

The Finance Secretary did announce an inflationary increase to the thresholds for the Starter and Basic rate bands which will mean that Scottish taxpayers earning less than £28,867 will pay less than their equivalents in the rest of the UK, albeit by a maximum of £23.06 per year.

However, the SNP is again freezing the thresholds at which the higher and top rates of tax will bite. This will maintain the punitive position for Scottish taxpayers with income over £43,663 where they will suffer 42% income tax and 10% National Insurance Contributions until £50,000. This burden will be 2% less than the current year as a result of the UK Government’s decision to cut National Insurance at the recent UK Autumn Statement.

From a practical perspective, a sixth income tax band will mean further complications for taxpayers and incur costs for their advisers and HMRC who will have to deal with its implementation. The fact that income tax rates and bands for savings income and dividends are reserved by Westminster further stirs the already muddy water and it is no surprise that Scottish taxpayers are struggling to understand their tax affairs.

Land and Buildings Transaction Tax (LBTT)

LBTT is applied to residential and non-residential land and building transactions in Scotland. Ms Robison announced there would be no changes to LBTT for 2024/25 with rates and bands remaining the same. The Additional Dwelling Supplement (ADS), which normally applies on the purchase of a second residential property valued above £40,000, will also remain at 6% for 2024/25.

* First‑time buyers are entitled to LBTT relief up to £175,000. 

What’s next?

Looking ahead, we know that a General Election must take place by January 2025, but could well be called earlier. Tax policy will form a key battleground in the run-up as the parties try to gain favour with the electorate and there was talk of tax cuts in the run-up to the Autumn Statement. 

If the UK Government were, for instance, to reduce income tax rates in their expected March budget, the Scottish Government would need to decide how to respond and, as the Scottish Parliament is required to agree its income tax plans before the start of the tax year, this scenario would leave MSPs in a race against time ahead of 6 April.

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