People often talk about the Laffer curve: the idea that if you raise a tax beyond a certain point, you may in fact reduce revenues. Laffer curve effects are rather more common in newspaper headlines than in actual tax data. But that may be about to change – we’ve a new analysis showing that Scotland’s increases in the top rate of income tax, culminating in the rise to 48% in April 2024, may now be costing Scotland around £22m of lost tax in its first year.
The 48p rate was always a political symbol rather than a serious revenue measure. The sums are trivial – a rounding error against Scotland’s £18.6bn total income tax take. But when you use tax as a symbol, people are entitled to ask what the symbol actually means. The awkward possibility is that Scotland’s gesture of asking more from its highest earners is costing more than it collects.
The Sunday Times has more on the story here, including a response from the Scottish Government (which doesn’t engage with the data).
Updated on 1 August 2026 with a response to the Future Economy Scotland article.
The Scottish rates
After a series of increases, Scotland now has six income tax bands and the highest income tax rates in the UK:
This understates the complexity because of the interaction with National Insurance thresholds, child benefit claw back, and the personal allowance taper – sometimes the gap is much wider than the headline rates suggest.1
Back in 2021, the Scottish Fiscal Commission acknowledged that the first increase in the Scottish rates, which took the top rate from 45p to 46p, “raised limited additional revenues, and might even have resulted in a small loss of receipts”. That didn’t stop two subsequent increases in the rate.
The April 2024 increase
In April 2024, Scotland’s top rate of income tax went from 47p to 48p (compared to 45p in the rest of the UK). At the same time, a new “advanced rate” of 45% appeared on income between £75,000 and £125,140 (the rate in the rest of the UK is 40%).
The revenue projections for the new 48p rate were unusual.
If we just multiplied the new tax rate by the number of people earning that amount, we’d expect it would raise £53m – so that’s the “static” revenue estimate.
But we have to adjust for “taxpayer responses” – avoidance2, reduced effort and migration. That is normal, particularly when you get to higher incomes, where people often have control over how much income they declare, in what form, and in which year.3 But when the Scottish Fiscal Commission applied the normal approaches, they came out with an unusual result – 85% of that £53m disappeared in taxpayer responses, leaving only £8m of revenue.
The problem for Scotland is that its ability to raise income tax is constrained by the rest of the UK. For someone with a permanent home in the UK, moving to another country is a fairly big deal. Moving4 from Scotland to the rest of the UK (and vice versa) is far easier.5 For people with two homes, on either side of the border, it can be a judgment call.6
Migration is an actual real-world step, but most of the taxpayer response will be fictional – people doing things which only make a difference on paper. That’s always the case, but Holyrood’s limited devolved powers make the situation worse. Whilst Holyrood can set its own income tax rates for employment and self-employment income, everything else – dividends, savings income, capital gains, the personal allowance, and every relief – remains reserved to Westminster.7 A Scottish company owner who pays herself in dividends rather than salary leaves the Scottish tax base without moving house.8 So does a Scottish employee making an additional pension contribution. Both are cheap, legal and immediate.
These effects can be quantified and (to a degree) predicted. That astonishing 85% fall from the static estimate came from HMRC figures analysing the moment in 2018-2019 when Scottish rates started to diverge from the rest of the UK.9
To state the obvious: £8m is a very small amount, and the figure comes with a great deal of uncertainty.10 The measure could raise more than this, but it could raise less – and eight million is close enough to zero that it could lose money. The IFS speculated that Scotland’s top rate rises “may have reduced revenues”.
We covered all of this in our piece on the Laffer Curve and in an episode of Untaxing on Radio 4. I congratulated the Scottish Government on conducting about as close to a controlled experiment as tax policy gets: same currency, same labour market, no border – and the rest of the UK three points cheaper. I couldn’t wait to see what happened.
We now have some data.
On 9 July, HMRC published the first outturn covering a full year of the 48p rate. So guesses, hypotheses, and estimates can be checked against reality.
What the data shows
HMRC publishes the tax raised in each band, for Scotland and the rest of the UK (which I will rather clumsily write as rUK). It also publishes the number of taxpayers in each band.
It is then trivial to calculate the taxable income declared by these taxpayers and the taxable income per taxpayer:
| Scotland | Rest of UK | |
|---|---|---|
| Top rate above £125,140 | 47% → 48% | 45% → 45% |
| Taxpayers above £125,140 | 35,400 → 41,400 (+17%) | 731,400 → 805,200 (+10%) |
| Tax raised in that band | £1,876m → £2,069m (+10%) | £54,978m → £63,797m (+16%) |
| Implied income in that band | £3,991m → £4,310m (+8.0%) | £122,172m → £141,771m (+16.0%) |
| Income in band, per taxpayer | £112,754 → £104,202 (−7.6%) | £167,039 → £176,070 (+5.4%) |
Scotland’s total income above £125,140 grew 8% – less than rUK, but still respectable. But the number of Scots above the threshold grew 17%. So the income per taxpayer, the last line in this table, fell.
Is that a one-off?
One way to get an overall picture of what’s going on is to calculate the ratio of Scottish top rate income per taxpayer to UK top rate income per taxpayer.11 We expect the ratio to be less than one, because UK top incomes are higher. We don’t necessarily expect it to have changed over time.
But it has:
For seven years the ratio sat in a band between 73% and 81%, wobbling but going nowhere, and apparently unaffected by the 2018 rise in the top rate. Then, in the years of the rise to 47p and then 48p, it falls to a level well below everything that came before.12
Other HMRC data has additional support for the idea that this is people who can control their income (e.g. landlords, investors and company owner-managers), managing it down. This chart shows Scottish tax as a proportion of UK tax, separating out self-assessment income tax from PAYE income tax:13
Scotland’s share of PAYE14 in 2024-25 was 8.43% – off its recent high, but statistically indistinguishable from the eight years before it.15
Scotland’s share of UK self assessment income, by contrast, fell to 4.90% – a statistically significant drop.16
I think it’s better practice to look at Scotland’s relative change in self-assessment income against the rest of the UK, but the absolute figure felt as well – from £6,598m to £6,503m. This was only major part of the Scottish tax statistics to see a fall- PAYE rose 16%.17
So we have two independent comparisons: the fall in the income ratio against the rest of the UK, and the drop in self-assessment income (in both relative and absolute terms). Both are consistent with our hypothesis that high earners who can control their own income are doing so to minimise their 48p liability.
What it has cost
If our hypothesis is correct, we can estimate the loss in tax caused by the 48p rate:
- Take the taxpayers who were already in the £125,140+ band, stripping out the new entrants. Let’s assume for the moment that the new entrants are £4,000 above the top rate threshold, i.e., their income is £129,140.
- Ask what the already-in-the-data taxpayers would have declared if their incomes had grown like their counterparts’ in the rest of the UK. This is a critical assumption upon which our estimate will rest. I discuss below whether it is in fact a reasonable assumption to make.
- That gives a Scottish top rate base of about £4,646m — 7.8% bigger than the £4,310m actually declared
- Tax all of it at 45% and it raises £2,091m., against the £2,069m top rate tax actually collected.
- So the 48p rate cost Scotland about £22m.
If we change that assumption, the result changes (because the higher amount we allot to new entrants, the lower the income of people who were already here, and the more pronounced the estimated loss of tax revenue):
What income should we assume for new entrants into the data? They are mostly people dragged over a frozen £125,140 threshold by a year’s pay rise, so on average they will sit only a little above it – about half a year’s growth, or roughly £4,000, which gives a cost of about £22m.
That figure is very cautious: some entrants arrive well above the threshold – movers into Scotland, a growing business, or one-off bonus years. So £22m is our central estimate; the range is £15m–£30m.18
How does this compare with the previous estimates from HMRC and the Scottish Fiscal Commission? That depends on what we think the taxpayer response we’re seeing is a response to:
- If the fall in 2024/2025 is a delayed response to the whole of the three-point gap with the UK, then it’s more than the SFC expected, but within HMRC’s expected range of taxpayer responses (and the HMRC figures always implied the Scottish rates could lose money).19
- But if the fall reflects the increase to 48p then it’s a huge taxpayer response20, much greater than anything expected by HMRC or the SFC, or indeed in the literature.
There is a reason to think that “delayed response” reading is the right one. Migration and incorporation are not small decisions, and they’re not quick decisions. It also fits the shape of what we saw in the statistics — two consecutive falls rather than a single step.
So that chart at the top of this article comparing the static revenue from the 48p increase to the dynamic revenue may have understated the problem. Even if we look just at the impact of the 1p rise and not the two rises before it, the chart looks like this:21
Couldn’t it just be volatility?
The most thoughtful challenge to this analysis22, from Future Economy Scotland, is that Scottish top incomes are volatile – they swing about from year to year far more than the UK’s. So the 2024-25 fall might just be one of those swings, with nothing to do with tax.
FES is right that the numbers are volatile. Here’s the annual gap between Scottish and rest-of-UK top-income growth, and it does indeed lurch up and down:23
Rather than just eyeballing this, it’s useful to run some statistical tests to see if the 2024/25 result is plausibly explained by the historical volatility.
First, against the normal range. The grey band in the chart marks the range the gap normally stays within – two standard deviations either side of its average.24 The 2023-24 fall sits just inside that band; the 2024-25 fall breaks below it. Put through a formal test, 2023-24 is about a one-in-eleven year and 2024-25 about one in twenty.25
Second – the two largest annual falls in the whole record are the two most recent. If the year-to-year changes had come in a random order, that would happen only about one time in 28.26
Third, we went back further. FES point to a longer HMRC series – taxpayers with total income of £150,000 or more – which we can take right back to 2010-11, the first year that band exists. It isn’t the same measure as ours – it stops before 2024-25, it includes dividends (which we’d expect to be more volatile), and it compares Scotland with the whole UK rather than just the rest of it. Here it is, on the same format as the first chart:27
This longer series is no more volatile than ours – a standard deviation of about 6 points over 2010-24, essentially level with our own 6.28
A 13-point fall would be outside the normal range of either series.
FES make two further points. They note that the 2023-24 cut in the top-rate threshold (from £150,000 to £125,140) pulled proportionally more people into Scotland’s top band than the UK’s, which would mechanically drag Scotland’s average down. That’s a fair point about 2023-24 – but 2024-25, the larger fall, compares a £125,140 threshold with a £125,140 threshold, so composition from the threshold change can’t explain it.
They also show that an alternative ratio built on total income actually rose in 2023-24, rather than falling. This is, however, consistent with our hypothesis. If high earners move income out of salary and into dividends, it leaves the Scottish tax base (NSND – non-savings, non-dividend income) – while remaining in a total-income measure. On our hypothesis NSND should fall but total-income should not.
Two further points are worth making. FES suggest Scottish top incomes grew more slowly than the UK’s “over the period” – but that period includes the two disputed post-policy years. Before the policy, from 2016-17 to 2022-23, the Scotland-to-rest-of-UK ratio was essentially flat (73.3% to 74.6%), with no pre-existing downward trend for either volatility or slow Scottish growth. The fall is confined to the two years the rate went up.
There is no sign of an exodus. In 2024-25 – the year the top rate reached 48p – the number of Scottish top-rate taxpayers grew.29 That is not contrary to our hypothesis, which is about income management, not migration.30
So, if we step back from the numbers, “random volatility” isn’t a good explanation:
- the fall came in two consecutive years – the two years Scotland put its rate up to 47p and then 48p;
- it reached a record low and fell further the next year;
- a separate, suggestive cross-check – Scotland’s share of UK self-assessment – drifted down in the same two years.
Taken together, these results show that the recent fall is unusual. They do not rule out random volatility: the clean 2024–25 result is a roughly 5–7% lower-tail event under our two simple models, and the two-year test is complicated by the 2023–24 threshold change. Our point remains: the absence of a pre-existing downward trend, the timing of the two falls and the separate self assessment evidence all make tax-related income management the most plausible explanation that’s consistent with the evidence.31
But is our hypothesis correct?
We need to be very careful here. The data is consistent with our hypothesis, but it certainly does not prove it. There are potential counterarguments and alternative explanations:
- It could just be noise in the data. Our simple tests found the two movements to be statistically significant, but that doesn’t stop them from being pure chance. These are nine-point annual series, and tests on so few observations are inherently fragile.32
- There was no such effect first time Scotland raised its rate. This isn’t very surprising. The 2018-19 rise created a divergence of only 1 point against the rest of the UK, where today’s is 3 – and behavioural response scales with the size of the gap, not the size of the change. But important to note, there absolutely was an actual effect found by HMRC from the 2018-19 rise, analysing their much more detailed data – but the methods we’re using here to analyse the published headline data aren’t able to detect the 2018-19 effect.
- Non-tax effects. There could be non-tax effects that mean that Scotland is attracting a disproportionate number of people just over the top rate threshold. For example, and this is simply illustrative, what if there had been an increase in the number of mid-level hospital consultants in Scotland? I don’t know if there are any real effects like this.
- It could be the North Sea, not the tax.33 Scotland has a reasonably large and gas sector, which is both highly paid and shrinking. Offshore incomes are dropping, and this is mostly a Scotland-specific effect – so could this create an apparently anomalous drop in Scottish high incomes? Yes, but not large enough to explain this data. Two reasons for this. First, the last genuine oil price crash, in 2020, didn’t have this kind of effect34Second, the income that has gone missing is far larger than the sector could plausibly account for.35 the element that would definitively settle this would be separating out top rate taxpayers by region to seewhether this is an Aberdeen story or a Scotland-wide one. Only HMRC holds that data.
- The rest of the UK saw a large increase in its aggregate top-rate tax base. Income falling above £125,140 rose by 16%, but most of that reflects a 10% increase in the number of additional-rate taxpayers as frozen thresholds pulled more people into the band. Income in the band per taxpayer rose by 5.4%, broadly in line with economy-wide nominal earnings growth. That still leaves open the possibility that differences in the composition of top earners – for example, London finance and professional-services incomes – made the rest of the UK an imperfect counterfactual for Scotland. That would not explain the anomalies in the two Scottish data series, but it could mean that our estimate of the revenue loss is too high. It’s even possible that Scotland’s high earners would have grown their incomes more slowly than the UK’s regardless of tax. If so, the rest of the UK is simply too high a benchmark, and a fair comparison (if we had the data to do it) might show the rise raised money after all.
- The UK data is an estimate. £4,272m of the rest-of-UK figure is an estimate for unreconciled PAYE cases (i.e. where HMRC has not finalised the position).36 For whatever reason, HMRC seems much further behind than it was this time last year when only £291m was an estimate. The Scottish equivalent is £37m. These estimates are allocated across bands by modelling rather than observation (because the observations are not complete). This could distort the results – for example, if there was a correlation between cases being unreconciled and the amount of tax paid by a taxpayer.
We will have a little more clarity in a year’s time – next year’s data will at least resolve whether this was a blip or a real trend. However, if we are to understand what the trend really means, then we will need more detailed data than the very macro numbers used in this analysis.
For example:
- Bunching analysis around £125,140 on the HMRC Survey of Personal Incomes. If people are managing income down to the threshold, there would be a “spike” around £125,140 in Scotland and not in England. It’s a standard technique, and HMRC has the data to do this easily. However, there is no public data which provides anything like the necessary granularity.
- Pension contributions and dividend income for Scottish taxpayers above £100,000 or so. On our hypothesis, both jumped in 2024-25. There is no public data on this.
- Monthly address-change data. Possibly we’ll see increased migration, although my bet is that the effect is dominated by pension contributions and dividends. If it were migration rather than income-shifting, it would be slower to appear – and it would show up here first. Again, there is no public data.
Until we get that kind of data, all we have is a hypothesis.
Scotland would not be the first to find its top rate parked on the knife-edge of the Laffer curve: when the UK itself ran a 50p additional rate from 2010 to 2013, the revenue effect turned out to be so close to zero that no one could agree even on its sign.37
We finish where we started. None of this is really about the money. £22m is a rounding error in the Scottish budget, and always was. But that is precisely the point: the 48p rate was never chiefly about raising money. It was intended to demonstrate that Scotland taxes its highest earners more heavily than England. The emerging evidence suggests that some of those earners have responded – and that the price of the gesture may be negative revenue.
Photo of First Minister John Swinney speech in Scotland on 27 November 2024 by the Scottish Government, via Wikimedia Commons. Licensed under CC BY 2.0.
Disclosure: I was a member of the Scottish Government’s Tax Advisory Group. The group was not consulted on the decisions to introduce or set the rates discussed in this article. The Scottish Government disbanded the group in February 2026.
Thanks to F and K for help with the elasticities and reviewing the statistical tests.