Scottish top rate income tax hike to raise just £8m

In their forecasts, released alongside the budget, the independent body also says that the new 45% band of income tax, introduced on incomes between £75,000 and £125,140, should raise £147m, but when behavioural changes are taken into consideration, the yield will drop by around 59% to just £74m.

In total, £199m should be raised, but those behavioural changes, which can include someone, will see that reduced by £118m.

The Commission’s chair, Professor Graeme Roy, said an overall sharp increase in income tax receipts would see the Scottish Government’s budget of jump by around £1.3bn next year, a rise of 2.6% in cash terms or 0.9% after accounting for inflation.

However, he warned that much of this would be taken up by public sector pay deals, the council tax freeze and social security.

Professor Roy said: “Whilst resource funding will increase next year, and by more than we predicted in May, spending commitments including social security, public sector pay and the council tax freeze will mean individual Cabinet Secretaries will face some difficult choices.

“The Scottish Government has introduced a new tax band in Scotland further increasing the tax differential with the rest of the UK on high earners. This policy, along with the effects of fiscal drag, is forecast to boost income tax revenues in Scotland”

In their analysis, the Institute for Fiscal Studies (IFS) said the income tax increases announced by Ms Robison would be “small beer” in the context of the budget.

However, David Phillips, an Associate Director at the thinktank said they would be “more sizeable for those affected by them.”

He warned that at some point ministers would have to try and “look beyond” income tax.

He added: “For example, a Scottish taxpayer with an income of £125,000 will pay £5,221 more in income tax than they would in [the rest of the]UK - equivalent to a 7% hit to their post-tax income.

“In addition, the SFC estimates that behavioural responses offset 90% of the increase in the top rate of tax from 47p to 48p in the pound. At some stage, the Scottish Government will have to look beyond income tax - for example to council tax- if it wants to continue raising revenue from richer Scots.”

Writing in The Herald, the SNP MSP Ivan McKee, a former minister for business, trade, tourism and enterprise, was sceptical about the new tax band and higher rates for top earners. 

"Much has been made about the risk of people leaving the country if tax rates are increased further.

"The data shows that more working-age people still move from England to Scotland each year than relocate in the opposite direction.

"But if just three out of every 100 taxpayers in the new Advanced tax band decide to move (or not to come to Scotland in the first place) then it will actually reduce rather than increase the funds available for public services.

"Increasing the top rate to 48p is only estimated to raise £8 million, with £45m lost due to people changing their behaviour moving south or switching income into company profits that go directly to Westminster, not Holyrood.

"Half of the revenue from the new 45p rate, another £74m, is likewise lost to behaviour changes.

"The additional risk is that people start to expect tax rates to be increased on an annual basis with that uncertainty weighing heavily on their decision-making."

Speaking to journalists in Holyrood on Tuesday, Ms Robinson said the government was keeping a "very close eye on" behavioural change. 

She said there was "no strong empirical evidence of behavioural change to date," but that it was not something ministers were complacent about.

The Deputy First Minister added: "We believe in the package of things that people will come to live and work here. It's a very strong offer. Public sector pay is higher and therefore there's a number of reasons why someone would come and locate to live and work in Scotland."