Scotland’s decision to push its top income tax rate higher than the rest of the UK may have seriously undermined its own fiscal ambitions, new analysis suggests.
Research by lawyer and tax expert Dan Neidle indicates that Scotland’s move to raise the top income tax rate to 48 per cent has resulted in lower overall receipts for the government.
HMRC data from 2024-25 showed the Scottish government collected £22m less than projected, prompting Neidle to suggest the country “may have fallen over the Laffer curve.”
The Laffer curve, modelled by economist Arthur Laffer, holds that tax rates can only rise so far before revenues begin to fall, as growth slows or wealthy individuals relocate.
Scotland has incrementally raised its top income tax rate over the past eight years, pushing it above the UK-wide rate of 45 per cent on earnings above £125,140.
The data suggests high earners took active steps to reduce their taxable income, including paying themselves through dividends or redirecting earnings into pension contributions.
Neidle’s research body, Tax Policy Associates, examined average taxes paid by top-rate taxpayers in Scotland and across the UK, alongside the proportion of income taxpayers filing through self-assessment.
In both measures, the share of tax income generated in Scotland declined, strengthening the case that higher rates are discouraging taxable income at the top end.
Neidle described the £22m figure as a “conservative estimate,” suggesting the true loss could reach around £30m once all factors are accounted for.
He noted that a 1p rise in the top rate could have raised £53m under normal circumstances, highlighting the significant gap between expected and actual revenues.
Neidle cautioned that there could be “noise” in year-to-year data making calculations uncertain, and that non-tax factors may also drive swings in the number of higher earners based in Scotland.
The findings carry implications beyond Scotland, serving as a warning for politicians elsewhere who are considering raising taxes on high earners to fund public spending commitments.
The calculations are particularly relevant for Andy Burnham and John Healey, who face pressure to raise taxes on wealthy individuals to fund large spending packages later this year.
Burnham previously said he would raise the top rate of income tax to 50 per cent, but has since rowed back on the pledge citing his commitment to Labour’s election manifesto.
A spokesperson for the Scottish government pushed back on the analysis, stating: “Our economy is one of the best performing parts of the UK, with Scotland the top UK destination for foreign direct investment outside London for the past eleven years.”
The spokesperson added: “The number of Scottish taxpayers and liabilities continued to grow strongly in 2024-25 and the number of top-rate taxpayers also grew faster in Scotland than the rest of the UK.”
The government defended its overall approach, saying: “Our approach to progressive taxation means that those who earn more pay a little more to support policies that are not enjoyed elsewhere in the UK, such as free university tuition, free prescriptions, and the game changing Scottish Child Payment.”
The dispute highlights a fundamental tension in tax policy between raising rates and maintaining the revenue base that public services depend upon.