The Scottish Budget for 2024 has been announced and there are going to be Income Tax alterations occurring next year that affect the nation’s highest earners.
In short, the tax rates for incomes under £75,000 will remain unchanged, but a new tax band has been introduced.
In 2024, earnings between £75,000 and £125,140 will now fall into the newly established 'advanced tax rate' which has been set at 45 per cent. Those earning more than £125,140 will face an increased ‘Top rate’ of 48p to the pound.
What will Scottish Income Tax rates look like in 2024?
With the new changes taken into account, here’s what the Income Tax bands will look like for the year 2024/25.
- Starter rate (£12,571 - £14,876) = 19 per cent
- Scottish basic rate (£14,877 - £26,561) = 20 per cent
- Intermediate rate (£26,562 - £43,662) = 21 per cent
- Higher rate (£43,663 - £75,000) = 42 per cent
- Advanced rate (£75,001 - £125,140) = 45 per cent
- Top rate (over £125,140) = 48 per cent
The personal allowance will remain at £12,570, so anyone earning below this will not be taxed and anyone earning above it will only pay tax on the earnings over this amount.
For those earning below £75,000
It's worth noting that the Scottish Government will be raising the thresholds for the starter and basic rates in line with inflation, whereas the threshold for the higher rate tax remains fixed at £43,662.
The fixed higher rate tax threshold means people might end up paying more tax if their wages rise with inflation due to fiscal drag, even though their actual buying power hasn't increased.
For those earning between £75,000 and £125,140
Those with incomes in this bracket will now be subject to the new 45 per cent 'advanced tax rate'.
This change is likely to affect a significant number of higher earners in Scotland, which means you’ll need to do some careful financial planning and potentially reconsider some tax-efficiency strategies in the new year.
For those earning above £125,140
Earnings above this threshold will now be taxed at 48p per pound (48 per cent). This increase could amount to a substantial increase in tax liability for top earners so it’s advisable to discuss other alternatives to salary – like dividends – with your accountant.
Tax-efficient savings and investment strategies, such as ISAs or pensions, may also be able to mitigate the impact of these increased liabilities.
An experienced accountant may even be able to advise on available tax reliefs and allowances that could reduce your taxable income.
This includes making the most of pension contributions, charitable donations, or capitalising on any eligible business-related deductions.
The Scholes view
With the freezing of the higher rate tax threshold, some of you may find yourself in a higher tax bracket due to 'fiscal drag'.
As mentioned, this occurs when inflation boosts your income into a higher tax bracket, increasing your tax rate even though your real purchasing power hasn't changed.
It will likely bring an additional group of taxpayers into the higher rate band so early discussions and strategy meetings with your accountant are essential.
The Scottish Government's decision to introduce a new income tax band and adjust the existing structure might be aimed at raising additional revenue for services but will likely have harsh implications for individuals crossing into different income brackets.
As accountants, we are here to guide our clients through these changes, ensuring they are well-informed and prepared for the financial year ahead as well as providing you with tax efficiency strategies and liability mitigation techniques.
Please speak to one of our team if you are worried about the fallout from the budget or wish to discuss your current Income Tax situation.