Higher taxes, lower returns: what Scotland's income tax data tells us about the limits of squeezing harder

Two stories landed in the same week. On the surface, they have nothing to do with each other. One is about Scottish income tax receipts. The other is about a new regulatory regime for captive insurance in London. But put them side by side and a pattern emerges — one that anyone setting policy, or running a business affected by it, should pay attention to.

The pattern is this: pushing harder on a lever doesn't guarantee more output. Sometimes it just changes where people put their money, or whether they stay to be taxed at all.

The Scottish experiment

In 2023, the Scottish government raised its top rate of income tax to 48p. The logic was straightforward — higher earners pay more, the government collects more, everyone else benefits. It's the kind of arithmetic that looks clean on a spreadsheet.

Reality has been less cooperative.

According to analysis by tax lawyer Dan Neidle, HMRC data from 2024-25 suggests the policy may have backfired. Receipts from the top rate appear to have fallen, not risen, since the increase took effect.

This isn't a fringe theory. It's a direct read of the numbers, and it echoes a debate that's been running in economics for decades: at some point, a higher rate doesn't produce more revenue — it produces less, because behaviour changes.

High earners in Scotland have options that lower earners don't. They can:

Relocate south of the border, where the same income is taxed less
Restructure income through dividends, pensions, or timing of bonuses
Simply reduce taxable activity — working less, retiring earlier, or shifting income into non-taxable forms

None of this requires anyone to break the law. It just requires people to respond rationally to incentives, which is exactly what economic actors tend to do.

Why this matters beyond Scotland

The Scottish case is instructive because it's measurable. The data exists, the policy change is clearly dated, and the effect — if Neidle's reading holds — is visible in the receipts.

But the underlying lesson isn't unique to income tax, or to Scotland. It applies anywhere a policymaker assumes that turning a dial harder produces a proportional result.

The Bank of England is currently facing its own version of this dilemma, just from a different angle. Interest rates have been held at levels intended to squeeze inflation out of the economy. The theory is sound: raise the cost of borrowing, reduce spending, cool prices. But the longer rates stay elevated, the more the Bank has to weigh whether further tightening is still doing useful work, or whether it's just adding drag — slowing growth, squeezing mortgage holders, and discouraging investment without meaningfully changing the inflation picture.

In both cases, the question is the same: has the lever stopped working the way the model says it should?

A different kind of policy signal: the captive insurance proposal

Interestingly, the same institutions responsible for these blunt instruments are also capable of the opposite approach — creating room rather than closing it.

The PRA and FCA's joint proposal for a new captive insurance regime is a case in point. Rather than tightening rules to extract more from an existing market, the regulators are proposing a framework designed to attract a fast-growing sector to the UK in the first place.

This is worth noting because it represents a different theory of how to grow revenue and activity: make the environment attractive enough that people choose to bring their business here, rather than assuming they'll stay regardless of the terms.

It's not a coincidence that this proposal exists alongside the tax and rates debates. Regulators and policymakers across the UK are, in effect, running two experiments simultaneously:

Squeeze harder on existing taxpayers, borrowers, or activity — and hope receipts or outcomes improve.
Make the offer better — and hope activity grows because people want to be here.

The Scottish tax data suggests the first approach has limits. The captive insurance proposal is a bet on the second.

The uncomfortable truth for policymakers

None of this means taxation or interest rates are pointless tools. They're not. But the Scottish receipts data, read alongside the Bank of England's rate-hold dilemma, points to something policymakers on both sides of the border are being forced to confront:

People and capital move. They respond to incentives, not to intentions.

A tax rate set with good intentions can still produce falling receipts if it pushes enough high earners to leave, restructure, or reduce activity. An interest rate held at a punishing level can still fail to control inflation if it simply stalls growth without addressing the underlying causes of price rises.

The lesson isn't that governments should never raise taxes or hold rates. It's that assuming a linear relationship between policy severity and outcome is a mistake — and one that's now showing up in hard data, not just economic theory.

Key takeaways

Scotland's top income tax rate rise to 48p may have reduced receipts rather than increased them, according to analysis of HMRC data by Dan Neidle.
High earners have real options — relocation, restructuring, reduced activity — that make aggressive tax rises less predictable than simple arithmetic suggests.
The Bank of England faces a parallel dilemma: holding interest rates high risks diminishing returns, slowing growth without proportionally taming inflation.
The PRA and FCA's captive insurance proposal shows an alternative approach — attracting activity through better terms, rather than extracting more from existing participants.
The shared lesson for policymakers: pushing a lever harder doesn't guarantee a bigger result — it can just change behaviour, and not always in the direction intended.