Reacting to: Scotland's tax hike may have backfired as receipt falls (City A.M.) →
Scotland's top rate of income tax is three points above the rest of the UK, and HMRC's outturn data for the first full year of the 48p rate shows how people who control their own income responded.
Few appear to have moved. Most changed the form their income arrived in — a dividend rather than a salary, a pension contribution rather than a bonus. Owner-directors in Belfast, Bolton and Bexley can make the same choices, and the Scottish figures show how much they are worth.
What the data shows
The analysis is by Dan Neidle's research body Tax Policy Associates, reported by City A.M. on 26 July. Scotland's top rate of income tax went from 47p to 48p in April 2024, against 45p in the rest of the UK, and a new "advanced rate" of 45% appeared on income between £75,000 and £125,140 where the rest of the UK charges 40%. On 9 July, HMRC published the first outturn covering a full year of the 48p rate, which turned the projections into something checkable.
The numbers, as reported:
- The static estimate — rate multiplied by the people in the band, before anyone reacts — was that the 48p rate would raise £53m.
- The Scottish Fiscal Commission's own costing expected 85% of that to disappear in taxpayer responses, leaving £8m.
- Neidle's reading of the outturn is that it is instead costing around £22m, which he calls a conservative estimate that could reach £30m.
- For scale, Scotland's total income tax take is £18.6bn. Even on the worst reading this is a rounding error — roughly one part in eight hundred.
Scotland's share of UK PAYE income tax in 2024-25 was 8.43% — essentially unchanged against the previous eight years. Its share of self-assessment income tax fell to 4.90%, which Neidle describes as a statistically significant drop. PAYE holding steady while self-assessment falls points to people who file a tax return — landlords, investors, company owner-managers — reducing their taxable income, rather than people leaving.
Which income Scotland can tax
Holyrood can set income tax rates and bands on non-savings, non-dividend income only — wages, pensions, self-employment profits, rental profits. Everything else stays with Westminster. GOV.UK puts it in one line on its Income Tax in Scotland page: you pay the same tax as the rest of the UK on dividends and savings interest. Capital gains tax, the personal allowance, the dividend allowance and every relief are reserved as well.
So a Scottish company owner who takes a dividend instead of a bonus has stepped outside the devolved tax base without moving or restructuring. A Scottish director making a pension contribution has done the same. Both are, in Neidle's phrase, cheap, legal and immediate.
Worked numbers: salary, dividend and pension
These are illustrations using published 2026/27 rates. Your own figures will differ.
First, the employee case, to size the gap. Take a salary of £100,000 with a standard £12,570 personal allowance. In Scotland the bill runs through six bands — 19%, 20%, 21%, 42% to £75,000 and then 45% — and comes to £30,732. The same salary in England or Northern Ireland is taxed at 20% then 40% and comes to £27,432. A gap of just over £3,300, and note that most of it comes from the advanced rate rather than the famous 48p. National Insurance is identical on both sides of the border because it was never devolved.
Now the owner-director case. Take £30,000 of company profit and a director already taxed at the top rate, and compare what they keep.
- Route A — a bonus through payroll. £30,000 of company cost supports a gross bonus of £26,087 once employer's National Insurance at 15% is covered. For a Scottish director, 48% income tax plus 2% employee NI takes exactly half: £13,043 net. For a director in England, 45% plus 2% leaves £13,826 net.
- Route B — a dividend. £30,000 of profit bears corporation tax at 25%, leaving £22,500 to distribute. Dividend tax at the additional rate of 39.35% leaves £13,646 net — the same figure on both sides of the border, because dividends are not devolved.
In England the bonus wins by about £180. In Scotland the dividend wins by about £603. On the same profit, the three-point difference in the top rate changes which route is better.
Two further points. If the company pays corporation tax at 19% rather than 25% — profits at or under £50,000 — the dividend route nets closer to £14,738, and the gap widens again. The pension route is worth more than either: a £30,000 employer contribution is normally deductible for corporation tax, so £30,000 lands in the pension for a net company cost of £22,500. By comparison, every £1 of cash bonus reaching a Scottish top-rate director costs the company £2.30 of profit. The annual allowance is £60,000, tapering where threshold income exceeds £200,000 and adjusted income exceeds £260,000.
What it means for directors, employees and landlords
If you are an owner-director anywhere in the UK. The salary-versus-dividend split is a live decision with a four-figure answer, and most owners set it once at incorporation and never revisit it. City A.M. notes that Andy Burnham and John Healey will face pressure to raise taxes on higher earners to fund spending later this year, and that Burnham has rowed back on an earlier pledge to take the top rate to 50%. Nobody outside the Treasury knows what lands in the autumn. Our post on how to pay yourself from a limited company walks through the mechanics, and the salary and dividend calculator will give you your own version of the numbers above in about two minutes.
If you are a Scottish taxpayer on PAYE with no company. Your £3,300 gap on £100,000 cannot be reduced by reclassifying income. Pension contributions get relief at your Scottish marginal rate, which makes them worth more to you than to your English equivalent.
If you are a landlord. Rental profits are non-savings, non-dividend income, so Scottish rates apply to them in full. That interacts badly with the Section 24 restriction on mortgage interest relief, which inflates taxable profit before the rate is applied.
Two things to do this week
1. Model your extraction for the current year before you draw anything else. Run the actual profit, your actual other income and the £500 dividend allowance through the salary and dividend calculator, and put the answer in writing. If your accountant has not sent you a remuneration plan for 2026/27, that is a reasonable thing to ask for.
2. Decide your pension contribution now rather than in March. An employer contribution has to be paid by the company's year end to land in that period's corporation tax computation, and the £60,000 allowance does not roll on indefinitely — unused allowance carries forward three years and then falls away.
What is still uncertain, and when you will know
Neidle qualifies his own finding. The £22m rests on the assumption that Scottish incomes would otherwise have grown as they did in the rest of the UK; single-year tax data carries noise, and non-tax effects can swing the number of high earners in a small population. The Scottish Government's response, quoted by City A.M., is that taxpayer numbers and liabilities grew strongly in 2024-25 and that the count of top-rate taxpayers grew faster in Scotland than in the rest of the UK. That does not address the per-taxpayer point.
Two dates will move this on. The next annual HMRC Scottish income tax outturn will show whether 2024-25 was a step change or a one-year fall. The autumn Budget will show whether any of this shaped the Treasury's thinking on higher-rate taxation UK-wide.
Setting your salary, dividend and pension mix is part of the tax planning we do for clients on our packages, and it is easier to do months before a year end than in the final week.