Almost quarter of a million more Scots could be higher rate taxpayers by 2027-28

Almost a quarter of a million Scots could become higher rate tax payers in the next few years if no changes are made to the threshold, experts have said.

The Scottish Fiscal Commission (SFC), the country’s official, independent economic and fiscal forecaster, said that by 2027-28 there could be 232,000 more people in the higher rate tax band.

That could see 17% of all taxpayers paying income tax at 41p, compared to the current proportion of 11.8%.

The possible rise comes as the SFC is basing its forecasts on an assumption that the threshold at which people start paying the charge at that rate, which is currently £43,663, would be frozen.

Professor David Ulph of the SFC said it had previously always assumed that the tax thresholds would rise in line with inflation.

But he said that historically that had not happened “so it seemed wrong to be producing forecasts on a baseline assumption which was patently unrealistic”.

The change in the way forecasts are done was carried out “in consultation with the Scottish Government”, he added.

“We said we were going to change our baseline assumption to one of the higher rate threshold being frozen, and that was agreed with the Scottish Government,” he said.

“That doesn’t mean that is what they will actually do, that is just our baseline assumption. All forecasts have to have a baseline and that is what is our new baseline.”

He added that in terms of the number of taxpayers affected, by 2027-28 “there is about another quarter of million higher tax payers because of that assumption”.

The SFC forecast document, published to coincide with the Scottish Government’s latest spending review,  noted: “The change in our higher rate threshold will mean that a greater proportion of Scottish tax-payers will  pay income tax at the higher rate.

“We estimate that the proportion of higher rate taxpayers will increase from 11.8% of total tax payers in 2022-23, to 17%  by 2027-28.

“This would mean around 232,000 more tax-payers in 2027-28 than if we maintained an assumption of inflation uprating.”

The SFC also revealed the Scottish Government could have to pay more than £800 million to the Treasury in 2024-25 for income tax reconciliations.

That is because the Scottish Government’s budget is, in part, based on forecasts from how much money it will raise from income tax, with the money it receives from the UK in the form of the block grant adjusted to take account of this.

However, if these assumptions do not tally with the amount raised, reconciliations can be needed.

The SFC said the Scottish Government is facing an “anticipated reconciliation of -£817 million to be applied in 2024-25”, although its report said the exact amount would be confirmed after HM Revenue and Customs publishes data for 2021-22 in the summer of next year.

In addition to the £817 million reconciliation, the Scottish Government is also facing having to pay £221 million to the UK Government in 2023-24, as well as another reconciliation of £238 million in 2025-26 – with these potentially totalling £1.276 billion over the three years.

SFC chief executive John Ireland said that previous forecasts were thought to be “too optimistic” and “so there has to be a payback”.

“We are now anticipating that in 2024-25 the Government will need to pay back to the Treasury the sum of just over £800 million.

“That will have a big effect on the budget for 2024-25.”