By Daniel Hough

It is almost become customary with each year that goes by that Scotland’s tax system diverges further from the rest of the UK. Much has been made of the complexity this introduces and the effect it may have on Scotland’s competitiveness as a destination for people to live and work – so it is worth reminding ourselves of what has actually changed.

From April, following the announcements made in December 2023’s Budget, we saw the introduction of a new tax band – the ‘advanced’ rate – and a further increase to the top rate, adding to the range of existing differences.

Taxpayers with earnings of between £75,001 and £125,140 pay 45% on this portion of their income, while anything higher will be taxed at 48% compared to 45% elsewhere in the UK.

However, even if these headline changes don’t affect you, you may find yourself paying more tax. The freezing of the ‘higher’ 43% tax rate threshold at £43,662 means that many people fortunate enough to see their pay increase in the past 12 months may find themselves paying a new rate – a process called ‘fiscal drag’.

This threshold is lower than the rest of the UK, where you only start paying the higher rate of 40% at £50,271. Between these changes and frozen thresholds, it means more people in Scotland now pay more tax than other parts of the UK. According to the Chartered Institute of Taxation, anyone earning more than £27,850 will pay more income tax in Scotland than someone earning the same amount in other parts of the country .

With these changes, you might think that the highest tax rate you can pay is 48% - but the complications of the tax system mean the effective rate of tax for some people could actually be much higher. At the most extreme end, anyone with earnings between £100,000 and £125,140 could find themselves paying 67.5% on this portion of their income. This is caused by their tax-free personal allowance being tapered by £1 for every £2 that their adjusted net income exceeds £100,000 and is zero if their income is above £125,140.

While the changes won’t affect everyone to the same degree, it is still worth keeping an eye on. You may not be paying a 67.5% tax rate on a slice of your income, but if you are earning £75,000 or above and, therefore, fall within the new ‘advanced’ rate, you may find you are paying substantially more tax than you were last year.

One of the most straightforward ways to reduce that additional tax burden is to pay more into your pension. If, for example, you earn £110,000 and make a gross contribution of £10,000, your adjusted net income would fall to £100,000.

Doing this would reinstate your full personal allowance and provide an effective rate of tax relief of 67.5% on your pension contribution, reducing your tax burden by £3,050 while also boosting your pension pot for the long term through the power of compounded returns. For someone on £80,000, reducing their take-home pay to £75,000 by making extra pension contributions worth £5,000 could save £2,650. Anyone who finds themselves nudged into the higher rate may also want to look at doing something similar.

However, there are a couple of things to bear in mind. Firstly, make sure you have enough income to cover your monthly outgoings and enough cash to hand to cover at least six months’ worth of expenses. There is also a cap on the amount you and your employer can pay into your pension each year and still receive tax relief. For most people, the pension annual allowance is 100% of your UK relevant earnings or £60,000, whichever is lower.

Given the fluid political situation, there may well be further changes ahead for the tax system in Scotland. So, before you make any decisions, it’s more important than ever to speak to a professional financial adviser who can guide you through the steps you can take to ensure you are in as strong a financial position possible in the here and now, while saving for the future too.

Daniel Hough is a financial planner at wealth manager RBC Brewin Dolphin