Repeatedly targeting the highest earners for tax hikes risks driving away top talent and leaving Scotland scrambling to compete globally, leading business figures have warned.
EY said the changes have created a notable tax cross-border divide, which will now include a significant number of NHS professionals, senior teachers and other civil servants.
EY Scotland Managing Partner Ally Scott said: "This compounds an existing concern for employers in Scotland looking to retain talent in an already tight skilled labour market, and something we hear regularly from clients and the workforce itself.”
He added: “Scotland is the only part of the UK to record four years consecutive growth in foreign direct investment, and while it maintains enviable rankings we are seeing a softening in investor sentiment with other parts of the UK closing in on Scotland’s lead.
"Both existing and potential investors cite a skilled workforce, innovation and an agile ecosystem amongst key drivers to establish or expand operations here, therefore retention and attraction of talent is exceptionally important, especially if these skills are mobile."
Vishal Chopra, head of tax for Scotland at KPMG UK, said: “At this time of year most people have one focus and one focus only – making the festive season the best it can be during difficult times. It’s therefore unsurprising that some may feel a little ‘bah humbug’ about the tax announcements.
“A new 45% ‘advanced rate’ of tax will be introduced for those earning between £75,000 and £125,140. In addition, the top rate of tax will increase from 47% to 48% for those earning above £125,140. These measures are estimated to raise an additional £82m.
“However, far more tax will be raised by ‘stealth’. The Scottish Government estimates that freezing the higher rate threshold (impacting those taxpayers earning £43,663 and above) will add an additional £307m to its Income Tax forecast, when more taxpayers will fall into these bands as wages rise with inflation."
'No longer a simple affair'
Alexandra Docherty, Partner and Head of Private Client Tax, Johnston Carmichael, said: “It’s no longer a simple affair to understand how much tax you pay in Scotland on your income and as Scottish taxes continue to diverge from the rest of the UK tax rates and tax bands, there could be a wider economic impact for Scotland in trying to attract talent North of the border.
She added: "These further increases to tax rates will reduce the spending power in the Scottish economy for those facing the brunt of these increases. Someone earning between £100,000 and £125,140 was already experiencing a 63% effective tax rate in Scotland (plus the 2% national insurance burden), due to the loss of the tax-free personal allowance. This will be a 67.5% tax rate by 6 April 2024 (plus 2% national insurance).
“Even without this tax rate increase, some have argued that what the Scottish taxpayer needs instead is a tax reduction. In fact, individuals earning over £28,000 already pay more tax than their UK counterparts. Someone earning £50,000 in Scotland will pay £1,542 more next tax year than their UK counterpart. The tax differential increases as income rises, with someone earning £150,000 in Scotland set to be £5,600 worse off in 2024/25 now this latest tax rate increase has come into play.
“With over 39% of Scotland’s adult population not currently paying any income tax - based on figures published by the Scottish Government in December 2022 - it had been suggested that the focus should potentially have been redirected into ways in which the country can increase the taxpaying workforce, as that in turn would generate more tax revenues, as well as reduce the Scottish Budget deficit."