Fear and fury as Scotland raids the rich

‘Brutal’ income tax changes under SNP threaten to erode the country’s competitiveness

On Valentine’s Day in Edinburgh, there was a smell of malt in the air but not much romance. The city’s famous castle was concealed behind a thick cloud of fog as rain fell on leafless trees in Princes Street Gardens. Businessmen began meetings by apologising about the weather.
For Jamie Cameron, a 30-year-old Scot living in London, it is not the weather putting him off moving home: it is tax.
Cameron, who spoke using a different name, works as an accountant and moved to England after university. He was hoping to move back to Edinburgh within the next 18 months to settle down, “but I’m in an earnings bracket where the latest set of tax changes are brutal”.
Scotland was handed devolved powers to set its own income tax rates in 2017. Since then, higher earners have faced a steadily increasing burden north of the border. Then, in December, the Scottish National Party (SNP) dropped a bombshell.
From April, anyone earning over £75,000 will fall into a new “advanced” rate band, paying 45pc. This is the rate people in England pay only when their salary surpasses £125,140. In Scotland, the top rate will also rise from 47pc to 48pc. The changes will hit 154,000 high earners.
Taken together, the changes mean a person earning £140,000 a year, such as a chief constable in the police force, will pay £5,678 a year more in tax in Scotland than if they lived anywhere else in the UK.
If Cameron were to move to Edinburgh on his £105,000 salary, he would have to start paying around £3,500 a year more to the taxman. He is now considering moving to Manchester instead. 
“I can live there for the same price, but pay less tax. Why would you do it?”Cameron’s calculations embody the fears of business leaders across Scotland. Those in the highest-paying industries warn that the tax divergence could destroy hopes of hiring talent and strangle growth.
Sandy Begbie, chief executive of Scottish Financial Enterprise, says Scotland is becoming a dangerous place to be rich or create wealth.
Many executives are cautious of publicly criticising the SNP for fear of burning bridges with Holyrood. However, privately they are aghast. The tax gulf has hit a tipping point and will now start to erode Scotland’s competitiveness, warns one executive at a large financial services firm. 
“Previously, the difference wasn’t meaningful enough to feature significantly in that decision matrix. Now, its role will increase. It will be a slow burn,” he says. “Ultimately, this is a competitive sport.”The tax changes will be particularly painful for Scotland’s financial services sector, which contributes £14.3bn a year to Scotland’s economy, nearly a tenth of total gross value added (GVA).
The sector is targeting growth of £4bn to £7bn over five years. Instead it could shrink, warns Begbie.It is not just financial services. “This is a regular component of conversations with clients across the country, across all sectors,” says Geoff Aberdein, former chief of staff to the First Minister and managing director at True North advisers.
The threat to growth is “huge”, says Douglas Ross, leader of the Scottish Conservative Party.
Behind closed doors, business leaders debate whether the SNP has become financially incompetent or is just determined to stick it to the rich.
Deputy first minister Shona Robison insists the SNP’s tax hikes are “progressive and grounded in evidence”.
“They carefully balance the need to raise revenues with the impact on taxpayers and the economy,” she says.
But according to the Scottish Fiscal Commission (SFC), the new top rate of tax will trigger so much behavioural change that 85pc of the revenue it could have generated will evaporate.
Instead of bringing in a potential £54m, raising the top rate will bring in just £8m as high-earners flee the country or restructure their finances.
David Stone, the SFC’s head of economy and income tax, concedes the actual tax take from the new top band could feasibly be even less.
In total, the changes will bring in an extra £82m for the Scottish government in the coming tax year. This will be barely 1pc of the total anticipated £19bn in total revenue from Scottish income tax.
As well as making it harder to attract talent, the changes mean people could work less overtime, turn down promotions, increase their pension contributions, or leave, warns Stone.  
Even people in their 20s have become highly engaged with tax planning, according to Stephen Parker, managing partner at Evelyn Partners in Glasgow.
“I have more clients being political than I probably ever have before. It feels raw and emotional for people.”
Some high net worth individuals are already quitting Scotland. Estate agents across the border in Northumberland say they have started getting calls from wealthy people wanting to move to England for tax purposes. Berwick-upon-Tweed, a 40-minute train from Edinburgh, is particularly popular.
“Most say that they enjoy living in Scotland but want to move just south of the border for purely financial reasons,” says Jonathan Hopper, chief executive of Garrington Property Finders.
Has anyone actually put their money where their mouth is? A buyer moving from Berwickshire, on the Scottish side, has just purchased a £500,000 home in Berwick-upon-Tweed, says Amy Brown, associate director at Rettie estate agents.
“They became aware that a colleague on a similar pay grade was paying significantly less in tax. So they decided to move,” she says. This particular buyer made the decision even before the December Budget made the tax divergence worse.
Visit Berwick’s prestigious Castle Terrace and wealth is on show. In front of one of the grand stone houses overlooking the Tweed estuary, two peacocks strut across the driveway.
Ally Scott, managing partner for EY Scotland, which employs 1,300 people north of the border and hires around 150 to 200 people per year, is concerned.
“What is the impact of lower take-home pay on [Scotland’s] sustained attractiveness? I’m talking about on the foreign stage as well as the UK stage. That has to be a concern for us.”
If businesses increase salaries to make up for the higher tax burdens, profits will be hit. This risks making Scotland a less attractive place to invest. Currently, cheaper wages in Scotland relative to the rest of the UK are a key pull factor for foreign investors.
Companies are seeking legal advice on relocations, says Duncan Reoch, who leads EY Scotland’s private client team.
Not all businesses can move easily, however. In the North Sea, there is fury. The income tax changes come on top of the windfall tax, which Labour plans to increase and extend.
Aberdein at True North says: “It’s palpable in Aberdeen, the anger and frustration with the lack of understanding of how a complex industry works.”
Income tax divergence between Scotland and the rest of the UK is likely to get even bigger. Chancellor Jeremy Hunt wants to cut UK taxes in the Spring Budget. If he does, Scotland’s First Minister Humza Yousaf has said he will not adopt the changes in Scotland.
A Scottish government spokesman pointed out that Scotland’s economy grew by 0.4pc in the third quarter of 2023 while the UK economy fell into a technical recession at the end of last year.
The SNP also argues that while people in Scotland pay more, they get more from the government, such as free university tuition.
Cameron, however, remains unconvinced. He says: “It’s not like it’s freeing up a huge investment to clear an NHS backlog. What the hell are we getting for it?”