While the 2026/2027 Scottish Budget included measures to increase the income tax thresholds for lower earners (meaning they pay marginally less tax than those in other parts of the UK), the Higher, Advanced and Top rate thresholds in Scotland remain unchanged, leaving some high earners exposed to paying 67.5% in income tax.
This isn’t an official rate of income tax and isn’t mentioned in any legislation, but comes from the tapering of the personal allowance when your annual income goes over £100,000.
The good news is there are ways to reduce your taxable income - one of which is to make pension contributions - to effectively sidestep this tax pitfall.
Impact of changes to income tax
In April 2024, a new Advanced Rate of Income Tax was introduced, resulting in a total of six official Income Tax Rate Bands in Scotland. In the recent Scottish Budget, which was finalised on 25 February 2026, the Scottish Government did not abolish any of these rates; the only change was to increase the basic and intermediate thresholds by 7.4%.
Scottish taxpayers will continue to pay the 45% Advanced Rate on earnings between £75,000 and £125,140 and the 48% Top Rate of income tax thereafter. However, the reality is that those earning between £100,000 to £125,140 will be paying an effective rate of 67.5% on this part of their earnings.
The loss of the personal allowance
As mentioned above, the 67.5% is not one of the official Scottish tax bands, but the reason for this effective rate of tax is due to the loss of your personal allowance.
If you earn more than £100,000, your personal allowance of £12,570 is reduced by £1 for every £2 that your income exceeds £100,000 until it reduces to NIL at £125,140. Once it reaches NIL, not only have you lost your tax-free allowance, but you will have reached the Top Rate tax threshold and be straight into the realms of 48% income tax .
For anyone with earnings between £100,000 and £125,140, it is this reduction in personal allowance (which creates an additional tax rate of 22.5%), combined with the advanced rate of 45% tax, that results in the 67.5% tax rate.
For example, a higher-rate taxpayer earning £100,000 receives a bonus of £10,000. This £10,000 bonus is taxable at 45% resulting in a tax liability of £4,500. Then, as the income has breached £100,000, the personal allowance begins to reduce by £1 for every £2 over. The £10,000 bonus now reduces the tax-free personal allowance by £5,000 effectively subjecting previously untaxed income to the Advanced Rate of tax (45%) resulting in a further tax liability of £2,250.
That means that the original £4,500 tax paid, plus the additional £2,250 due because of the personal allowance reduction, gives a total of £6,750 of income tax paid on the £10,000 bonus; an effective rate of 67.5%.
Reducing your taxable income
There are ways you can look to reduce your taxable income, which can be particularly attractive if you are just over one of the thresholds, one of which is by increasing your pension contribution.
Depending on your earnings, this could mean you avoid the 67.5% pitfall while also enhancing your retirement benefits.
Our financial planning team can discuss whether increasing your pension contribution is suitable for you, while our tax team can offer strategic tax planning solutions to meet your personal needs. For advice and support, please contact 0808 144 5575 or email help@armstrongwatson.co.uk.
