More Scots hit by 'quirk' that will see them pay tax of 54p in pound

More workers in Scotland are being hit by a "quirk in the system" that will see them pay an effective marginal tax rate of 54p in the pound next year.

The Scottish Fiscal Commission (SFC), the official forecaster, highlighted the "wrinkle", which affects those earning between £43,663 and £50,271.

They will pay 22p in the pound more than counterparts in England because of the interaction between income tax and national insurance.

National insurance rates are tied to the UK higher rate of income tax, which is £50,271, rather than the lower Scottish threshold of £43,663.

Picture: PA

Elsewhere, the SFC said the Government will have to "think quite carefully" about how to prioritise spending in the face of rising social security costs.

Scottish ministers are expected to spend £1.4 billion more on social security than the funding they receive from the UK Government by 2027/28.

They also face a large "negative income tax reconciliation" of around £732 million in 2024/25, the SFC said, due to the difference between forecasts and tax actually collected.

Everyone earning more than £43,662 will pay more income tax in Scotland next year following changes announced in the Scottish Budget.

The higher rate of tax will rise from 41p to 42p in the pound and the top rate will increase from 46p to 47p.

The higher rate threshold will be maintained and the top rate will be lowered to £125,140 from £150,000.

In a briefing for journalists, Professor Graeme Roy, chair of the SFC, said: "The consistent and the cumulative effect of freezing the higher rate threshold means that more people in Scotland are becoming higher rate taxpayers, and that means they are now paying the higher rate of tax on a lower level of income than the equivalent person would be doing in England."

He added: "We're bringing more people in Scotland into paying what is now the 42p tax rate than they are in England. So somebody earning £45,000, for example, in Scotland now pays a marginal income tax rate of 42 per cent. That same person in England would be paying a marginal tax rate of 20 per cent.

"Now there's an additional wrinkle...which is the interaction between income tax and national insurance, so essentially the total tax that people pay on working.

"That is 12 per cent up to the rest-of-the-UK higher rate threshold, then it drops down to 2 per cent.

"So you've got this quirk in the system that a certain group of higher rate taxpayers in Scotland, so people between roughly £43,500 and £50,000, pay 42 per cent marginal tax on income but then still pay the 12 per cent tax on national insurance, giving them a marginal tax rate of 54 per cent.

"Whereas somebody in England over that [income range] is only paying 20 per cent plus the 12 per cent, so only paying a marginal tax rate of 32 per cent.

"So somebody in Scotland faces, essentially, for every additional pound they earn, 54 pence of that being taken by a combination of the Scottish Government and the UK Government."

Meanwhile, Prof Roy said the gap in economic performance between Scotland and the rest of the UK is forecast to continue.

He said a “significant chunk” of this is driven by Scotland’s demographics, including an ageing population.