Scottish Budget 2024-25: How will it affect you?

On 19 December, Scotland’s deputy first minister and finance secretary Shona Robison set out the devolved government's spending plans for the next year. How will the changes impact you?

Due to the timing of the Scottish Budget, just before Christmas, you would be forgiven for thinking it somewhat fell under the radar, certainly in comparison to the level of coverage the Autumn Statement attracted a few weeks earlier. But especially for middle and higher earners in Scotland, the impacts of the budget on how much you take home next year are quite significant.

Since 2017, the Scottish Government has had the power to set its own tax policy on earnings from employment and its approach has increasingly diverged from the rest of the UK, including doubling the number of income tax bands to six. The Scottish Government does not have the power to change allowances, National Insurance or tax on non-savings, non-dividend income.

Despite increasing income tax just a year ago for those earning over £43,663, Robison said further income tax rises on middle and higher earners are now required in order to plug a £1.5 billion hole in Scotland’s books, as well as to fund a freeze in council tax and business rates.

Income tax rises

Continuing with the Scottish Government’s strategy in recent years, the income tax hikes will mainly affect those who earn above the median wage in Scotland (forecast to be £28,200 in 2024/25). While the “starter”, “basic” and “intermediate” rates of income tax are held at 19%, 20% and 21% respectively, the “top” rate of tax, levied against those earning more than  £125,140, will rise by 1% to 48%. This follows a 1% increase on the same tax band last year.

Meanwhile a new “advanced” tax band set at 45% will be created for those earning between £75,000 and £125,140. This means the “higher” tax band, which remains at 42% (having increased from 41% last year), is now only applied on income between £43,663 and £75,000.

While the thresholds at which people start paying the "basic" and "intermediate" rates of tax will increase slightly from April, along with the upper thresholds on the "starter" and "basic" rate bands, the entry thresholds for the “higher” and “top” tax bands are frozen at £43,663 and £125,140 respectively, a fiscal drag which will bring more people into the bands as wages rise.

Tax divergence

Recent cuts to National Insurance by the UK government will reduce the overall impact of the income tax rises, however as NI is not paid on pension income, retirees will not benefit from this. The Scottish Fiscal Commission said someone earning £100,000 in Scotland will pay £740 more income tax than last year and £3,346 more than taxpayers in England and Wales. Those earning more than £50,000 will pay at least £1,500 more income tax per year than they would in the rest of the UK while someone earning £150,000 will be paying almost £6,000 more per year.

“The general takeaway from the Scottish Budget, certainly for middle and higher earners, is you're going to be paying more but probably not getting much more,” says James​​​​ Bowater, Independent Financial Adviser at Ascot Lloyd. “Due largely to a lack of economic growth, there's a black hole that needs to be filled and limited borrowing powers the Scottish Government can use, so they’ve got two options: put up taxes or cut spending. They have opted for the former.

“The longer-term impact is a growing diversion in income tax policy from the rest of the UK. Initially, when the Scottish Government gained the powers to set its own tax policy six or seven years ago, it was a small divergence. But it is getting to the point now where it is quite substantially different. Not just in terms of the overall tax take but also the structures, different bands, what rates they come in at – pretty much everything is different now other than the things the Scottish Government still have no control over such as allowances and National Insurance.”

Marginal tax rates

As National Insurance is charged at 10% on income between £12,570 and £50,270, after which it drops to 2%, the total “marginal tax rate” (the total additional tax paid from an extra pound earned) for those in Scotland earning between £43,662 and £50,270 will be 52% from April.

For those earning six figures, the total marginal tax rate on income between £100,000 and £125,140 will be  67.5% because every £2 earned over £100,000 reduces their personal allowance by £1. This makes Scotland home to one of the highest marginal tax rates in the world.

“To some degree it's a natural consequence of devolution and having different parts of taxation policy controlled by different governments with competing priorities,” says Bowater. “It always surprises me that people don't object more, though that might predominantly be because of a general awareness gap about marginal tax rates and that could change in the near future. A mid-level teacher or nurse could be in that 52% marginal tax bracket. Would they consider themselves a higher earner such that over half of their income goes out in tax? Probably not.”

Conflicting messages

The paradox in narrative between the UK and Scottish Government is also quite striking. The Autumn Statement was a notably upbeat presentation which conveyed the UK as having "turned a corner" from the financial struggles of recent years and now in a position to start cutting taxes.

The Scottish Budget, taking place merely a few weeks later, was notably downbeat in tone, with Robinson referring to it as the toughest budget since the creation of the Scottish Parliament in 1999. The conflicting messages could leave Scottish people feeling confused about the future.

“It's becoming more established in Scotland that we expect to be presented with conflicting messages from two governments who do almost the opposite thing at the same time,” says Bowater. “2024 is a Westminster election year and it's clear the Conservatives want more of a positive message heading into that. The SNP want to retain seats in Westminster but it's not their sole focus because there is also a Scottish Parliament election, which is not due until 2026.

“Those party political differences have a real impact on people in Scotland. In a longer-term perspective, what might become apparent is two societies with different priorities and growth rates which influence people’s economic behaviour. Will someone who works in tech or finance, for instance, be willing to move from London to Edinburgh? Maybe the cost of living is lower in Edinburgh, but they'll be taxed more. Is a doctor going to want to work more if it means entering a high marginal tax rate? Will higher earners choose to move away from Scotland altogether?”

The value of advice

These wider impacts of Scotland’s divergent tax policy from the rest of the UK remain unknown for now, but what is certain is the value of financial advice – ensuring you are pulling the right levers so your financial future is as bright as possible. Pensioners, for instance, often have the flexibility to control the level of income they draw at different points, enabling them to avoid entering higher tax bands. Those still in work, meanwhile, can achieve similar outcomes by paying more into their pension or taking advantage of other salary sacrifice schemes available.

“I know plenty of people do that to a greater degree in Scotland because there are more tax bands and higher marginal tax rates,” Bowater adds. “Part of the value Ascot Lloyd offers is making sure people's financial plans are as tax efficient as possible. Obviously in a higher tax society that is going to be even more impactful and valuable than in a lower tax society.

“It's absolutely something people should consider. Do I understand my tax situation? Am I able to reduce the tax I pay in a perfectly legitimate manner? What are the options available to me? These are important questions that an independent financial adviser will ensure you answer correctly in the context of your individual circumstances and your long-term financial goals.”

If you’d like to speak with one of the trusted Independent Financial Advisers at Ascot Lloyd about how any of the announcements in the Scottish Budget will impact you, and how to build the right plan to meet your retirement goals, request a call back.