Ministers warned income tax hike will harm Scotland’s ability to attract ‘talent’

Shona Robison, the deputy first minister, announced the creation of a new band as part of her Budget

Shona Robison and Humza Yousaf. Picture: Andrew Milligan/PA

Hiking taxes for Scotland’s higher earners will deter investment and harm the country’s ability to attract and retain “talent”, ministers have been warned.

It comes after Shona Robison, the deputy first minister, announced a series of measures that will see those such as headteachers and doctors pay more in tax, while thousands of other workers face being dragged into a higher band.

A new “advanced” income tax rate will see Scots on a salary of between £75,000 and £125,140 pay 45 per cent instead of 42. Ms Robison also announced a 1 per cent increase to the highest rate of tax – for those earning more than £125,140 – to 48p in the pound.

The two changes will affect more than 150,000 taxpayers in Scotland – the top 5 per cent – while those earning more than £100,000 will now pay £3,000 more than in the rest of the UK.

Meanwhile, the threshold for the higher rate and the top rate of income tax will be frozen at current levels – £43,662 and £125,140 – meaning more people will move into those bands as wages rise. Around 62,000 people – such as teachers and accountants – face being dragged into the 42 per cent higher tax rate next year.

Ms Robison announced the moves as she delivered the Scottish Budget in Holyrood. She faced an immediate backlash over “devastating” cuts and a failure to replicate a business rates relief enjoyed by firms south of the border.

Taxpayers earning more than £28,850 already pay more income tax in Scotland than in the rest of the UK. As a result of the latest changes, Scotland will have six income tax bands while the rest of the UK has three. Those earning £150,000 will pay around £6,000 a year more than down south.

Ms Robison said the creation of the new band, together with the increase in the top rate of income tax, will raise £82 million next year. Freezing the higher rate threshold will raise £307 million.

She added: “Overall, taking a different, progressive course on income tax in Scotland means in 2024-25 we estimate we will have around £1.5 billion of additional revenues compared to if we had followed UK Government tax policies.”

Ministers had faced a £1.5 billion funding black hole ahead of the Budget.

Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: "The introduction of a new tax band for higher earning employees is a blow to Scotland’s attractiveness and places the personal tax system at a further competitive disadvantage compared to the rest of the UK.

"At a time when industry is dealing with a tightening labour market supply and skills shortages, further tax divergence will impact our ability to attract and retain the talent that business needs. We are concerned about the likely impact this will have on consumer spending and deterring potential talent from thinking about living and working in Scotland.”

Tracy Black, director of CBI Scotland, said the decision to introduce a new tax band “will harm Scotland’s ability to attract highly skilled employees and our competitiveness nationally and internationally”.

Scottish Secretary Alister Jack said: “Today’s Scottish Budget widens even further the tax differential between Scotland and the rest of the country. Making Scotland the highest taxed part of the United Kingdom is bad for our economy. It deters business investment and punishes hard-working people.”

Speaking to journalists, Ms Robison said the Scottish Government keeps “a very close eye” on whether tax changes lead to behavioural responses, such as higher earners choosing not to move to Scotland, “but there is no strong empirical evidence” of this to date.

Earlier, she said the Scottish Government would “fully fund” next year’s council tax freeze, which had already been announced by First Minister Humza Yousaf.

She said councils will get “over £140 million of additional investment” in 2024-25 for this. Cosla, the local government body, has been seeking at least £300 million. It said councils in Scotland are now facing a cut of £251 million.

The Local Government Information Unit previously found a quarter of councils fear effective bankruptcy next year. “With one in four Scottish councils warning that they may be unable to balance their books next year, today’s budget will not offer much reassurance,” said its chief executive Jonathan Carr-West.

Ms Robison said frontline NHS boards will see a funding boost of £550 million, taking their total to more than £13.2 billion. Ministers will also spend £6.3 billion on social security, more than £1 billion more than the total for 2023-24.

That will see Scottish benefits go up by 6.7 per cent in line with the CPI rate of inflation from September 2023, with the Scottish child payment, which helps low-income families with children, rising from £25 to £26.70 a week per child from April 2024. Campaigners, who had been pushing for £30 a week, called this "bitterly disappointing".

Ms Robison said business rates for premises valued under £51,000 would be frozen, while island hospitality businesses would be given 100 per cent rates relief.

However, her failure to replicate a 75 per cent tax break for hospitality, leisure and retail premises – previously extended for another year down south – was described as a betrayal by the Night Time Industries Association Scotland. It said Scottish business closures are now running at double the rate of those in England.

Ms Robison said the Scottish Government had prioritised NHS funding over business tax cuts.

Stephen Montgomery, director of the Scottish Hospitality Group, said: “The very real implication is that many Scottish hospitality businesses will struggle to survive, and customers will see prices increase. This will be a bitter pill to swallow for thousands of Scottish hospitality businesses, given English hospitality businesses will be benefiting from a 75 per cent business rates discount for the next year.”

Elsewhere, critics highlighted funding cuts in areas such as housing, rural affairs, and further and higher education. The total budget for housing and building standards will fall to £533.2 million from £738.3 million.

Scottish Tory finance spokeswoman Liz Smith said: “This Budget was as dismal and damaging for Scottish taxpayers and businesses as we had feared. Under the SNP, Scotland was already the highest taxed part of the UK – and the income tax rises announced by Shona Robison have only widened that gap and increased the burden on hard-working Scots.”

She added: “This will have a devastating effect on our ability to recruit and retain skilled workers, including the doctors and dentists Scotland’s under-resourced NHS desperately needs.

“The UK Government decided to give businesses 75 per cent rates relief. Shamefully, the Scottish Government has once again refused to provide similar support to the vast majority of Scottish firms.

“This betrayal again exposes Humza Yousaf’s ‘reset’ with business as a sham, because it increases Scottish firms’ competitive disadvantage with the rest of the UK.”

Scottish Labour finance spokesman Michael Marra said: “This is a chaotic budget from an incompetent Government that will leave ordinary Scots paying more and getting less in return. The SNP’s mismanagement of our public finances has left us with a massive gap to be filled – that is an SNP waste gap, an SNP incompetence gap and a huge SNP growth gap."