New analysis suggests that Scotland's decision to increase the top rate of income tax has backfired, leading to a reduction in expected revenue. The study by Tax Policy Associates, a think-tank led by former Scottish Government adviser Dan Neidle, concluded that raising the top income tax rate to 48 pence for Scottish taxpayers has likely resulted in £22 million less being collected in 2024/25.
According to the analysis, Scotland may have "fallen over the Laffer Curve." This economic theory posits that after a certain point, increasing tax rates can lead to a decrease in government revenue as individuals may work less, attempt to hide income, or relocate. This contrasts with the SNP's stated aim to boost economic growth.
The higher tax rates mean that individuals earning over £33,500 per year pay more income tax in Scotland than their counterparts in England and Wales. For those earning £50,000, the difference is approximately £1,500 annually. In April 2024, Scotland's top income tax rate, applied to incomes over £125,140, rose to 48 pence, a penny higher than the rest of the UK's 45 pence. Additionally, a new 45% "advanced rate" was introduced for incomes between £75,000 and £125,140, compared to a 40% rate in England and Wales.
Reports indicate that some high earners are choosing to live in England and commute to Scotland to avoid the higher tax burden. Wealth managers have observed individuals working in Edinburgh but residing south of the border for tax advantages, which is seen as detrimental to Scotland's economy. This phenomenon is not new; previous reports highlighted an exodus of high earners to northern England to mitigate the impact of tax hikes.
Some individuals have also opted to reduce their working hours to pay less tax. One finance worker, who lives in Scotland but works in England, stated that they now work a four-day week to reduce their tax liability. The worker also pointed out that the effective tax rate is higher when combined with National Insurance contributions and that the reduction in tax-free pension saving benefits further disincentivizes higher earnings.
The analysis also noted a decline in the number of operations performed by Scotland's NHS and rising cancellations, alongside a low for A&E performance in May. These public service metrics are being contrasted with the increased tax revenue collected, leading to questions about the effectiveness of the tax "social contract."