Taxes – those levied by the council and those paid by higher earners – are rising this spring, adding another burden to households across the north of Scotland hit by the cost-of-living crisis.
Come April, everyone earning more than £43,662 in Scotland will have to pay more income tax as set out in the Scottish budget in December.
Meanwhile, Scots who earn over £27,850 a year will be paying more tax than those making the same in England.
In addition, most households in council areas in Aberdeen, Aberdeenshire, Highlands and Moray are facing another increase in council tax to help meet budget black holes.
Personal tax bombshell
Personal tax rates for Scots were approved by MSPs in Holyrood last week.
This is despite evidence that the higher tax rates paid by Scots – particularly in Aberdeen and Aberdeenshire where there are more higher earners than average – won’t raise as much as expected.
The Scottish Fiscal Commission (SFC), the nation’s independent economic and fiscal forecaster, has highlighted that Scotland’s tax policies will raise around £700million less than forecast.
Professor Graeme Roy, chair of the SFC said this was due to economic underperformance.
“We are not actually raising as much as we should do because the economy is not performing as well.”
Critics have suggested higher rates of tax can cause people to leave or refuse to take jobs in the area, however Mr Roy is sceptical.
“A lot of time people talk about tax and about the potential of leaving Scotland and not coming to Scotland.
“To be honest there is very little evidence of that, because people tend not to make a life changing decision about where to live based on a few hundreds of pounds tax.”
Instead it tends to change employee behaviours.
“What it does potentially do is, as a decision on whether or not you work overtime, or whether you take a promotion, or whether you work a four day week and take a day off in pay,” he said.
“Working an extra day on a Saturday may not be what you do if basically you’re only going to take home half of that.”
All council tax payers facing higher rates
Meanwhile local authorities are set to announce council tax rises to plug expected shortfalls, with several warning about being forced to cut more services.
Aberdeenshire Council was one of the first to confirm that residents can expect a four per cent rise in their council tax starting in April, with others set to confirm tax rises in coming weeks.
Local authorities across the country have sounded the alarm about funding issues and potential cuts to services, with a leaked document last week showing a potential £22 million cut to social care and drugs services.
But the First Minister Nicola Sturgeon insisted her Government was providing a £570m cash-terms increase to council budgets.
However this is disputed by local authority body Cosla, which claims the figure drops to £71m when ring-fenced money for Government initiatives is taken into account.
Inflation struggle is real
Mr Roy pointed out that governments, like households and businesses, have not dealt with inflation at its current level for over 40 years.
He says that although the Scottish Government budget is up £1.7bn in cash terms this year, the spiralling rate of inflation has eroded this to around £239m – which is “basically nothing at all” on a budget of £40bn, he said.
“What they are facing is exactly what you and I face, which is our spending power is going down.”
Nationally, the Scottish Government is battling demands to increase wages by teachers, transport workers and others.
Cosla settled a pay dispute with workers employed by Scotland’s councils in August, adding 5% to the wage bill.
Nearly half of council budgets are spent on wages – forcing the government into “really tough choices”, Mr Roy said.
“If you face pay demands and your budget isn’t increasing that much and half of your budget is wages, the remaining half has to have cuts. And the remaining half are public services.
“It’s hitting hospitals, prisons, keeping the lights on, running libraries and after school clubs, fixing potholes in the roads. It’s all those things that come under pressure.
“What does Highland Council, Aberdeen Council and Aberdeenshire Council do when they face these pressures?
Good news is inflation will fall, but…
He is confident that inflation will come down quickly, not least because the Bank of England is bearing down on it with rising interest rates.
Policymakers at the Bank said inflation is almost “guaranteed” to come down rapidly this year unless there is a new, unexpected global event.
Things will get better – but it’ll take time. Just because inflation falls, it doesn’t mean that living standards immediately return to where they were. We’ll need several years of (welcome when we get it) economic stability. [3]
— Graeme Roy (@ProfGraemeRoy) December 15, 2022
However, Mr Roy, points out that once prices have risen they aren’t going to come back down below where they are now.
“There’s been a permanent shift up the cost of living. Your coffee that cost you £2.50 and now costs £3 isn’t going back to £2.50.”
A decade of doldrums
Finances in the UK have been in the doldrums for nearly ten years and prospects for recovery are few and far between, he explained.
“It’s coming on the back of Covid, which was obviously a really challenging period,” he said.
“It’s coming on the back of Brexit, it’s coming on the back of a sluggish decade after the financial crisis.
“We’ve not had that period my generation had when I was coming through school in the late 90s and through the early 2000s where the economy was really growing, living standards were improving. There was lots of money in the public sector.
“We’ve had a series of shocks on the back of each other. Each shock has been challenging but we add them all together it poses more of a challenge. Add it all up and that is the cost people face.”
Your taxes for 2023/24
Scotland’s income tax rates for 2023/24 were approved by MSPs at Holyrood on Thursday.
While there will be no changes to the starter, basic and intermediate rates, those on higher incomes will pay more after the approval of the Scottish Government’s proposals.
The higher rate will increase to 42% – a 1% rise – charged on income above £31,092 and up to £125,140.
The top rate has increased to 47% for those earning more than £125,140.
After a parliamentary debate on the Scottish rate resolution – which must be passed at Holyrood before the stage three budget process can go ahead – MSPs approved the changes by 90 votes to two, with 28 abstentions.
The SFC said this means the number of higher rate taxpayers in Scotland has grown by about 23% since 2016-17 compared to a 10% drop in the rest of the UK.
In 2023-24, the body expects 18.4% of all Scottish taxpayers will pay the higher rate of tax, compared to 11.6% in 2016-17.
According to the SFC, income tax policies in Scotland should net an extra £994m, but the real total is £325m, a gap of £669m.
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