Higher earners could benefit after forecasters suggest tax threshold rise

Middle and higher-income Scots may see a reduction in their income tax burden after official forecasters suggested a change to the SNP’s finance strategy.
The Scottish Fiscal Commission (SFC), Scotland’s official economic forecaster which also aids the Holyrood budget process, recently released guidance suggesting tax bands might increase in line with inflation. Previously, the SFC had anticipated freezing the higher, advanced, and top rate thresholds.
Business leaders are optimistic that these changes could help attract and retain skilled workers, who might pay less if they live in England.
Scotland maintains six tax bands compared with three in other UK regions, resulting in anyone earning over £29,000 paying more income tax than if they lived elsewhere. The disparity widens significantly for those earning above £43,663, where the Scottish higher rate of 42 per cent starts. A person earning £50,000 in Scotland pays approximately £1,500 more in income tax than their counterparts in other parts of the UK.
• Robison is braced for fallout from Reeves’s budget
The freezing of income tax bands contributes to fiscal drag, where rising wages push more people into higher tax brackets. Aligning tax thresholds with inflation could mitigate this effect, effectively increasing disposable income for many Scots. This adjustment might be seen as a politically savvy move, especially with the 2026 Holyrood election on the horizon and the SNP facing mounting pressure from a resurgent Labour party.
The SFC stated: “In December 2023, in our baseline, we assumed the higher, advanced, and top rate tax thresholds would remain frozen. With our new baseline, we assume these bands will rise with inflation. This adjustment has reduced our forecast of income tax revenues from 2025-26 onwards.”
As a result, the SFC now predicts £142 million less income tax revenue in 2025-26 compared to its previous December assessment. The forecast shortfall increases to £232 million in the following year, £329 million in 2027-28, and £492 million in 2028-29.
Senior government officials said the change was not an indication of ministers’ tax plans but instead is a reflection of fiscal drag.
At the SNP’s conference on Friday, Kate Forbes, the deputy first minister, warned that people could move out of the country if the Scottish government hikes taxes again. She said ministers had to “take into account the behavioural impact” when setting rates and bands.
The higher rate threshold has remained frozen for the past four Scottish budgets, impacting professionals such as teachers and police constables. About 650,000 Scots fall into the higher, advanced, or top rate taxpayer categories, up from 320,000 in 2017-18, when Holyrood first gained control over setting income tax rates. The SFC forecasts that this number will rise to approximately 850,000 by the decade’s end.
Scotland’s workforce includes nearly three million income taxpayers, an increase from 2.5 million in 2017-18. In April, Humza Yousaf introduced an additional rate of 45 per cent on earnings between £75,001 and £125,140, while the top rate, starting at £125,140, increased to 48 per cent. In contrast, England’s higher rate of 40 per cent begins at £50,270, with the top rate of 45 per cent also starting at £125,140.
Scottish workers must also pay the full 8 per cent National Insurance on earnings between £43,663 and £50,270, as this tax is set at Westminster and aligns with English income tax thresholds. The previous UK government planned to freeze income tax thresholds until April 2028, and the new chancellor Rachel Reeves seems unlikely to alter this plan in her upcoming budget on October 30.
Industry leaders would welcome any narrowing of the income tax gap between Scotland and the rest of the UK. Recruitment firms report candidates requesting a Scottish salary weighting, and various sectors argue that the current tax disparity hampers their ability to attract and retain staff.
Liz Cameron, chief executive of the Scottish Chambers of Commerce, cautioned that widening the tax gap would “undermine the ability of Scottish businesses to remain competitive and attract much-needed talent”. She emphasised the necessity of reducing the overall tax burden to spur growth, investment, and job creation.
Sandy Begbie, chief executive of Scottish Financial Enterprise, noted that their research shows tax divergence impedes 82 per cent of firms in retaining and attracting staff. He said: “Increased tax divergence with the rest of the UK has been a major concern for Scottish businesses in recent years.
“We would like to see a greater focus on using devolved income tax powers to give Scotland a competitive edge in attracting senior talent and creating high-value jobs in sectors like financial services. In the long term, we believe this is the best way to boost growth, create jobs, and fund vital public services. Any indication that the Scottish government might begin restoring income tax parity with the rest of the UK in the upcoming budget would be welcome.”