The latest data suggests a £22 million shortfall in income tax revenue for Scotland following the introduction of a 48% top rate, according to research by Tax Policy Associates. This figure represents a significant deviation from initial projections, sparking concerns over the economic efficacy of such policies. The analysis, based on HMRC data for the 2024-25 financial year, also reveals that high earners in Scotland may be adapting their financial strategies to mitigate the impact of increased tax rates.
The study's findings indicate a decline in average taxes paid by top-rate taxpayers in Scotland relative to the rest of the UK. Furthermore, the proportion of income taxpayers utilising self-assessment has decreased in Scotland, suggesting that high earners are adjusting their income structures to reduce taxable liabilities. These trends align with the 'Laffer curve' theory, which posits that beyond a certain point, increasing tax rates can paradoxically lead to a decrease in tax revenue.
The research suggests that high-income individuals in Scotland have been incentivised to reorganise their financial arrangements to minimise tax liabilities. This includes opting for dividend income or increased pension contributions, both of which can reduce taxable income. Neidle's analysis estimates that this shortfall could rise to around £30 million, with a one pence increase in the top rate potentially generating an additional £53 million in revenue.
The implications of this study extend beyond Scotland's borders, serving as a cautionary tale for UK politicians considering similar tax hikes. Labour politicians, such as Andy Burnham and John Healey, who have proposed increasing taxes on high earners to fund public spending programmes, may need to reconsider their stance in light of these findings.
In response to the analysis, a Scottish government spokesperson maintained that Scotland's economy remains strong, with robust growth in tax revenues from top-rate taxpayers. They highlighted that foreign direct investment continues to flow into Scotland, but failed to directly address the study's conclusions on tax revenue and high earners' financial strategies.