Higher earners in Scotland are set to pay more income tax as the Scottish Government seeks to plug its £1.5 billion funding shortfall.
A new 45% tax band has been introduced for individuals earning between £75,000 and £125,140. The top rate of tax, paid by those earning more than £125,000, will rise from 47% to 48%.
While the starter and basic rate tax band thresholds are to rise in line with inflation, Finance Secretary Shona Robinson announced that the higher and top rate tax bands will be frozen, meaning more people will be dragged into paying tax over time.
The tax changes mean Scotland now has six income tax bands, compared to three across the rest of the UK.
Clare Stinton, head of workplace savings at Hargreaves Lansdown, said: “People living and working in Scotland already face higher taxes than their English, Welsh and Northern Irish neighbours. The hikes announced today will no doubt come as unwelcome news to Scottish households caught in the net of the new ‘advanced’ tax band, who will face paying thousands more than their counterparts residing elsewhere in the UK.”
Stinton said those caught in the new income tax band should plan ahead and use tax-free allowances such as ISAs and SIPPs to minimise the impact of increased taxation.
She also warned that elevated taxation will likely raise concerns about the desirability of Scotland as a location for people to live and businesses to operate.
“Beyond the headline tax increases, the freezing of higher and top rates of tax thresholds will drag more people into paying more tax over time so even if you aren’t immediately affected then over time you could be,” she added.
The new tax band could also have consequences for pension contributions.
According to Jon Greer, head of retirement policy at Quilter: “Since pension contributions can be used as a means to reduce taxable income, individuals in the new 45% bracket might see an increased incentive to contribute more to their pensions, effectively reducing their taxable income and gaining more from the tax relief available on pension contributions.
“However, this strategy’s efficacy depends on several factors, including individual financial situations and the specifics of their pension schemes.”
Greer said clarity needs to be given “swiftly” to ensure that people can plan effectively.
“For those in pension schemes operating under the ‘relief at source’ method, where tax relief is claimed back from HMRC, there could be complexities in claiming the full relief owed, especially for those unfamiliar with detailed tax filings. This could mean that some miss out on increasing their pension contributions while reducing their taxable income.
“The changes highlight the importance of financial planning and getting advice, especially for those who might not be accustomed to engaging with the complexities of tax returns and pension contributions,” added Greer.
