Scotland spending review: More than 200,000 set to move to higher tax band by 2028 in Scotland

Hundreds of thousands of people will be dragged into paying the higher rate of tax in Scotland to help pay for the Scottish Government’s budget shortfall, the Scottish Fiscal Commission (SFC) has warned.

Forecasts from the commission state 219,144 additional taxpayers will fall into the higher rate income band by the end of the 2027/28 financial year, with the number paying the highest rate of tax almost doubling to 30,000 people.

The figures come as Scotland’s main economic forecaster warned of the risk of inflation becoming a self-fulfilling prophecy that becomes entrenched in the economy.

The SFC warned the pledged cut to the basic rate of income tax to 19 per cent, set to be introduced by Chancellor Rishi Sunak in 2024, could lead to a drop of £5.5 billion in tax revenues.

If Scottish finance secretary Kate Forbes was to follow this approach – a decision yet to be made – it could lead to a further reduction in available tax revenue of around half a billion.

SFC predictions assume a frozen higher rate tax threshold, currently set at £43,633, and the basic rate of tax remaining at 20 per cent.

This would lead to an improvement in the net tax position for Scotland in 2024/25 when the rest of UK gets a tax cut.

Kate Forbes is facing difficult financial choices in future budgets, including around tax.

David Stone, head of economy and tax at the SFC, warned: “Now we’re in a situation where nominal earnings are rising, around 4 per cent per year, but inflation is a lot higher than that.

"But even still, nominal earnings and a frozen higher rate threshold will mean a lot of people moving into that higher rate band over the next few years and starting to pay 41 per cent tax.”

Mr Stone said the Ukraine crisis had been priced in to forecasts, but the projections were “robust” for both a long and short duration of the war.

He said while the impact of the war was “fairly indirect”, it remained a “large risk” for the economy.

Mr Stone said: “Our forecasting does not include an explicit or even implicit judgement about when the invasion might come to an end.

"It is a fairly indirect effect and it’s more about our judgements overall on prices and energy and I think that’s robust to a range of different outcomes in the Ukraine conflict.

"But it remains a large risk. If things get a lot worse or a lot better, that could have effects on our forecasts quite clearly through its effects on not just energy, but the global supply situation as well.”

The public have also been warned the inflation shock will “make us all poorer”, with the SFC estimating a drop of 2.7 per cent in real terms earnings for all Scots this financial year.

SFC chief executive John Ireland said: “This shock is going to make us all poorer. The cut in real terms earnings reported in the forecasts are going to be a long-term figure, but obviously the big question for inflation is how much we will be able to manage that situation because it is a case that because a bigger share of budgets will go on these basic elements than they did before on expense incurred and that’s a painful situation for everybody in the country.”

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