Humza Yousaf under fire over 'new income tax band for high earners'

The spending shortfall is partly a result of inflation, but also Scottish Government policy choices, including public sector pay deals and a promise to freeze council tax next year.

Mr Yousaf previously said he was interested in an STUC proposal to introduce a 44p income tax band on earnings between £75,000 and the upper rate threshold of £125,140.

Research commissioned by the trade union group suggested this could raise £200m a year.

However economists think the potential revenue is much smaller, and could be as low as £40m once “behavioural effects” are taken into account, as people will try to avoid paying it.

Former SNP finance secretary Kate Forbes yesterday warned against a new band, which would give Scotland six income tax bands, compared to three in England and Wales.

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She told ITV Border: “I personally don’t think that it delivers additional revenue. It’s very difficult to protect against behavioural change when it comes to increasing income tax.

“We already have significantly increased tax rates and bands here in Scotland and therefore I think we have to be very careful about not ultimately reducing public revenue with what we do with our rates and bands.”

Her successor, the deputy first minister Shona Robison, is due to set out the budget next Tuesday, against one of the toughest financial backdrops since devolution.

After standing in for an unwell Mr Yousaf at FMQs, Ms Robison was asked if there would be a new tax band.

Refusing to address the question head-on, she said: "I'll be setting out the tax proposals next Tuesday in the budget."

Asked if she denied a new tax band was coming, she said nothing and fled up a staircase to the ministerial offices.

Anyone earning less than £27,800 in Scotland currently pays a few pounds less in income tax than their counterparts south of the border.

However, anyone earning above £27,800 pays more, with someone earning £50,000 in Scotland paying around £1,500 more than in England and Wales.

If a sixth band is added along the lines suggested by the STUC, it could mean someone earning £100,000 in Scotland could be around £3,600 worse off than in England.

Tory MSP Liz Smith said: “It appears Humza Yousaf is intent on naively trying to tax his way out of the SNP’s financial black hole.

“That would be disastrous for Scottish taxpayers – already the hardest hit in the UK – and a sure-fire way of discouraging people from living and working here.

“A tax gap of thousands for middle and higher earners will drive away all sorts of workers. 

“Doctors, dentists, teachers and entrepreneurs – exactly the people we need to attract, and who provide growth and essential services – will all have an incentive to leave, or not to come here in the first place.

“This is alongside the savage cuts to Scotland’s infrastructure and public services, thanks to years of SNP mismanagement and underfunding. 

“All this comes after years of the biggest block grants in history, but spectacularly incompetent decisions by this Nationalist government.”

The creation of a new band is reported to have divided opinion in Mr Yousaf's cabinet, which took three meetings to sign off the budget.

In a letter published in the Times today, businss group leaders urged the SNP-Green Goverment to "avoid measures in the budget that may make Scotland less competitive, particularly in relation to any decisions on income tax rates and thresholds".

The signatories, who included Scottish Financial Enterprise, the Scottish Chambers of Commerce and the Institute of Directors, said they were "concerned that further divergence with the rest of the UK will reduce the spending power of Scottish consumers, damage business confidence, remove money from the real economy, disincentivise investment in Scotland and inhibit our ability to create jobs and attract and retain the talent our economy and society needs".

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The same tax free personal allowance of £12,570 applies throughout the UK.

In Scotland, there are currently five income tax bands: a starter rate of 19p between £12,571 and £14,732; a 20p basic rate between £14,733 and £25,688; an intermediate 21p rate between £25,689 and £43,662; a 42p higher rate between £43,663 and £125,140; and a top rate of 47p on earnings above £125,140.

South of the border, the basic rate is 20p but applies to earnings between £12,571 and £50,270; the higher rate is 40p between £50,271 and £125,140; and the additional rate on earnings above £125,140 is 45p in the pound.