Scottish Budget 2024-25 - Initial Reaction - All Is Not What It Seems At First

21st December 2023

Fraser of Allender Institute Explains.

Shona Robison presented her first budget to parliament this afternoon. In a half-hour-long statement, she set out the tax and spending plans for 2024-25. In the past couple of weeks, we have set out the challenges the DFM was likely to face today. In this blog, we set out our initial reaction to the statement this afternoon - but there will be more to come in the following days.

New "Advanced" band for income tax
The big news of the Budget (for good or ill!) is likely to be the introduction of the new tax band between £75,000 and 125,140, with a marginal tax rate of 45%. In a less well-trailed move, the SG has also decided to raise the top rate by a further penny to 48%.

When is an Inflationary uplift not quite what it seems?
The DFM said in her speech:

"We will increase the Starter and Basic rate bands by inflation to £14,876 and £26,561 respectively."

You might think that this means (e.g.) that the point at which you start to pay the Basic (rather than the starter) rate has increased by inflation, so it would mean that if you were only paying the Starter rate, and your pay went up by inflation, you would remain only paying the Starter rate.

However, the word “band” here is very important. When the Scottish Government lays the legislation each year to set the income tax bands, it sets out the size of the income tax bands above the personal allowance.

So, for the starter rate last year they set out that the 19% rate would be charged on the first £2,162 of income above the personal allowance.

It is this £2,162 that has been increased by inflation, to £2,306, resulting in the threshold increasing from £14,732 to £14,876 - which is only an increase in this threshold of 1%. Similarly, the change for the intermediate rate threshold represents an uplift of 3.4%.

Whilst the Scottish Government will no doubt say that they were clear it was the bands that were increasing by inflation (not the thresholds), this means someone who was paying only the starter rate before who has an inflation-linked pay rise could now be paying the basic rate on some of their income. It feels like this is pretty misleading, and mixing in the thresholds in the statement we've quoted doesn’t help with that impression.

Read the explanations HERE