Scotland’s tax hike may have backfired as receipt falls

The Scottish authorities’s choice to lift the highest fee of earnings tax could have backfired, in keeping with evaluation by the lawyer Dan Neidle. 

Neidle’s analysis on tax knowledge instructed {that a} choice to extend the highest earnings tax fee to 48 per cent led to decrease receipts. 

HMRC knowledge from 2024-25 instructed that the Scottish authorities collected £22m much less, with Neidle suggesting that the nation “could have fallen over the Laffer curve”. Scotland has regularly elevated the highest fee of earnings tax over the past eight years above the UK-wide stage of 45 per cent on earnings above £125,140. 

The Laffer curve, modelled by the economist Arthur Laffer, suggests that there’s restrict to how far taxes will be raised earlier than receipts start to fall as a result of impacts on progress or the richest leaving the nation. 

The info suggests that prime earners took steps to keep away from handing over money to the federal government by paying themselves in dividends, for instance, or sacrificing earnings for pension contributions. 

Neidle’s analysis physique, Tax Coverage Associates, checked out common taxes paid by prime fee taxpayers in Scotland and throughout the UK, plus the proportion of earnings taxpayers who paid by means of self-assessment. He discovered that the share of tax earnings generated in Scotland had dropped in each instances. 

He stated that if the speculation was appropriate, which will depend on incomes in Scotland rising as they did in the remainder of the UK, there could be a lack of round £22m. Neidle instructed this was a “conservative estimate” and will rise to round £30m. 

A 1p rise within the prime fee might have raised £53m, Neidle added. The tax knowledgeable added there might be “noise” in year-to-year knowledge which will make calculations unsure and there might be different non-tax results that would result in huge swings within the variety of increased earners in Scotland. 

Tax danger for Scotland

The calculations function a warning for Andy Burnham and John Healey, who will come below stress to lift taxes on the rich to fund giant spending packages later this yr. 

Final yr, Burnham stated he would increase the highest fee of earnings tax to 50 per cent however he has since rowed again on the pledge because of his dedication to Labour’s election manifesto. 

A spokesperson for the Scottish authorities stated: “Our financial system is without doubt one of the greatest performing components of the UK, with Scotland the highest UK vacation spot for international direct funding exterior London for the previous eleven years.

“The variety of Scottish taxpayers and liabilities continued to develop strongly in 2024-25 and the variety of top-rate taxpayers additionally grew sooner in Scotland than the remainder of the UK.

“Our method to progressive taxation implies that those that earn extra pay somewhat extra to assist insurance policies that aren’t loved elsewhere within the UK, corresponding to free college tuition, free prescriptions, and the sport altering Scottish Youngster Fee.”