Scotland: Taxed enough already? Maybe not

In Scotland, income tax has gone up, and the sky hasn’t fallen in. Those with incomes higher than Scottish median earnings (of just over £33k a year for all employees) pay more tax than the rest of the UK, and those on the very lowest incomes pay marginally less. Despite many Scots paying more in income tax, this widening tax gap has not been as destructive as newspaper headlines in 2017 made it seem.

Since 2018, Scotland has diverged from the rest of the UK with new rates and bands coming into effect leaving Scotland with six bands in total, compared with only three in the rest of the UK. This might not sound groundbreaking but in the context of a UK political culture that has left the basic rate of income tax unchanged since 1975, Scotland is experimenting with income tax in a way previous UK governments have not.  

In raising income tax several times since 2018, the Scottish government has not been met with an American style T-E-A Party movement (Taxed Enough Already). Quite the opposite, in 2021 the incumbent SNP won the parliamentary election after the first income tax increase, with increased vote share. What’s more, the Scottish public remain comparatively keener than the rest of Great Britain on the idea that tax increases would help to dig the UK out of the current fiscal hole.  

Recent YouGov polling finds that when posed with the straight choice between increasing taxes and making cuts to spending, Scotland is the only nation or region of Great Britain to favour tax increases over spending cuts (albeit by 1 per cent) where elsewhere the balance is more than 10 percentage points in favour of spending cuts.  According to polling we commissioned for our 10-year anniversary, 54 per cent of people in Scotland think taxes overall should be higher, with 45 per cent of the public believing the rich should pay more and 23 per cent saying they themselves would be willing to pay more. The fact that the most taxed part of the UK is the one most open to further tax increases should make policymakers across the UK take pause.  

In Scotland, the rationale for the current income tax policy is to raise additional revenues which the Scottish government can use to fund its policy commitments (an extra £616 million 2025/26 once block grant adjustments are accounted for, versus if the UK government continued to set income tax rates in Scotland ), but it also intends to signal Scotland is a nation where (to use a tired metaphor) those with the broadest shoulders contribute most in tax.  

Implementing this more progressive tax system is in line with the SNP’s political strategy to retain the centre-left of Scottish politics but also represents a real redistribution of money from the wealthiest to the poorest in society through Scotland’s enhanced social welfare package (particularly for children).

The graphic below demonstrates how the marginal rate of tax changes as earnings increase, comparing Scotland in blue with the rest of the UK in orange. Below an income of around £44,000, people in Scotland pay virtually identical income tax to those in the rest of the UK - some a little more, some a little less. Above this level the gap begins to widen, reaching about 3 per cent of gross income from an income of £50,000, with another widening of the gap to around 4 per cent above an income of £100,000.  

This kind of policy divergence within what remains the (semi-)unitary state of the United Kingdom is not without risk. Firstly, there is the geographic factor - free movement across the UK means higher earners currently based in Scotland may choose to hop across Hadrian’s Wall and settle in England taking their taxable earnings with them. And secondly there is “tax efficient income planning”; for example, paying into pension schemes or receiving income in the form of dividends (which are taxed by the UK government) rather than wages.     

How significant are these “behavioural responses” in practice? Since the divergence in income tax policy some analysis has sought to ascertain the impacts on revenue raised by the Scottish government. A 2024 HMRC paper found no evidence of changes in labour market participation in Scotland but did find a reduction in net migration from the rest of the UK to Scotland for the first year of the policy change for taxpayers above the higher rate threshold (2018-19). The Scottish Fiscal Commission (SFC) has estimated the behavioural effects of increased income taxes in Scotland on the highest earners. Approximately 85 per cent of the £53 million in revenue raised by the current Scottish top rate (48 per cent on earnings over £125,140) would disappear, raising only £8 million in tax. However, as the SFC readily admits, this is only a projection with “significant uncertainty”.  

It is up to the Scottish government, through the distinct Scottish social contract it claims to offer, to persuade those in Scotland that living and working here is worth the higher tax bill. And so far, it seems to be working. What we know for certain is that since Scotland introduced a distinct income tax regime, overall inward migration from the rest of the UK has increased to around 8,000 in 2022. Scotland’s penchant for the occasional universalist policy (free university tuition, free prescriptions) and greater affordability (cheaper property, successive council tax freezes) have led to articles such as this: ‘Why Scotland is the best place in Britain to be middle class’. This is, however, all relative to the rest of the UK. Scandinavia we are not, neither in the breadth and generosity of Scotland’s universalist offerings, or in the amount of tax we levy across a wider spectrum of Scotland’s taxbase (from both low and high incomes).

Before Chancellor Rachel Reeves said there would be no increase in income tax after all in the upcoming Budget, there was extensive debate over the rights and wrongs of raising income tax. The fact that Scottish politics has already been immersed in questions of income tax increases, thresholds, and bandings should serve as an example. Enough time has passed that the Scottish public will have felt its impact on their pay packets, and yet the reaction has been muted.

To the extent a lesson can be drawn for the Chancellor and the UK Labour party from this Scottish tax experiment it might be that the public won’t necessarily revolt over income tax increases. It is possible to make the case for progressive increases in income tax while in government. You can win the argument, and the world won’t come to an end.