Scottish Tax – The Cost of Tax Policy Differences

We have now entered the 9^th tax year in which HM Revenue and Customs operates separate Scottish tax rates for non-savings income.

It’s fair to say that the divergence of UK tax rates has become more significant in recent years, with far higher rates of tax being paid in Scotland for those with income over £27,491 including the 45% tax band for income over £75,000. As a comparison, 45% tax isn’t paid in the rest of the UK, until your income reaches £125,000.

Please see below the current 2025/26 non-savings income tax rates for both Scottish and UK taxpayers outlining the above;

Scottish PAYE tax codes

Employees and pensioners who reside in Scotland should always have a different tax code to those living in the rest of the UK in order to collect the specific Scottish Rates of Tax. These ‘S’ codes should be applied to any Scottish resident individual, but in some cases, outdated payroll and software systems are preventing pensions schemes and employers from operating the correct codes. It is important that individuals check that they have the correct tax code during the tax year, just to avoid any unwelcome tax bills in the future.

HMRC is still responsible for collecting and administering Scottish Income Tax on behalf of the Scottish Government, which forms part of the UK’s overall tax system. The Scottish Parliament’s Public Audit office continues to monitor the administration and cost of administering and collecting Scottish Income Tax, which latest figures suggest costs around an additional £1M each year.

It follows that the Public Audit Committee met with representatives from the Scottish Government and HMRC on Wednesday 26^th March 2025, to cover the report relative to the tax year 2023/24.

They confirmed that the provisional estimate of 2023/24 total tax receipts for Scotland is £17.254 billion, which is up on the final £15.159 billion raised for 2022/23. They went on to confirm that between 2017/18 and 2022/23, Scottish taxpayers have paid an additional £3.367 billion compared to their UK counterparts, due to tax policy differences.

Migration and impact on Tax revenue

Although data wasn’t available on the net impact of migration to and from Scotland, HMRC confirmed that migration out of Scotland led to a tax loss of c.£60 million mainly as a result of behavioural changes including early retirement and tax planning.  In the same week, it has been reported that a number of Scottish Civil Servants are choosing to live just over the English border in order to pay the lower UK rates of tax, since Scottish residence is driven mainly by where an individual’s main home is situated.

The Scottish Government are bringing forward the legislative programme, which will be presented at the Scottish Parliament on Tuesday 6^th May.  This will cover a number of actions the Scottish Government will take, including a response to recent economic challenges which have highlighted slower economic growth in Scotland compared to the rest of the UK.  There is no expectation that this will include any announcements in relation to Scottish Tax rates as this is normally part of the annual budget at the end of the calendar year.  However, given Scotland has an election due in May 2026, there may be scope for further change in the 2025 budget, although reductions in the rates of tax may be challenging given the current economic climate.  For now, the significant differential between the UK and Scotland’s tax rates shows no signs of being aligned.

AAB’s tax team have significant expertise in Scottish Income Taxes and helping individuals manage their overall tax exposure.  If you would like further advice, please get in touch with Lynn Gracie, Josh McCranor or your normal AAB contact.