The role of income tax in Scotland's budget

A discussion paper that aims to provide useful background to help inform the debate on future use of the income tax powers devolved to the Scottish Parliament.


1. The Agreement between the Scottish Government and the United Kingdom Government on the Scottish Government’s fiscal framework, February 2016.

2. It is effectively indexed by growth in corresponding per capita revenues in the rest of the UK.

3. This money is then partly re-distributed to Scotland via the Barnett formula.

4. The tax-free PA tapers off for those with income above £100,000. As soon as earnings exceed £100,000, the UK Government starts to withdraw the tax-free PA by £1 for every £2 of income above the £100,000 limit. This means the allowance is zero if income is £123,000 or above (2017-18 figures).

5. Refers to non-savings, non-dividend income tax

6. Information on UK taxpayers.

7. OECD’s Taxing Wages. Note that the latest available data used in this analysis are for 2014 and that the OECD average is unweighted. Government Expenditure and Revenue Scotland ( GERS) figures are used to calculate Scotland’s proportions.

8. Includes income tax, social security contributions, such as National Insurance in the UK, and all other taxes, such as Corporation Tax or VAT.

9. The overall tax on labour income is important as some countries may have low share of income tax but a higher share of other labour taxes.

10. Under 16s, those aged 60 and over, those with certain eye conditions, or those who fall into certain specific categories (e.g. patients aged 40 or over with a close family history of glaucoma).

11. Fraser of Allander Institute. Scotland’s Budget 2017. September 2017

12. The Gini co-efficient is a measure of how equally income is distributed across the population. It takes a value between 0 and 100 where 0 represents perfect equality. In 2015-16, the Gini co-efficient for Scotland was 34. World Bank figures show these range from around 60 (South Africa) to around
25 (Norway).

13. International Monetary Fund. Fiscal Monitor: Tackling Inequality. October 2017. See section on Progressive Income Tax (pages 10 or 13).

14. UK Consumer Price Inflation ( CPI) of 3% in September 2017 is used throughout the analysis.

15. See the Devolved Taxes Methodology Report published at the Draft Budget 2017-18.

16. The Council of Economic Advisers continue to provide advice to the Scottish Government on analysis of revenue risks and possible mitigating actions associated with differential additional rates of income tax between Scotland and the rest of the UK.

17. It is assumed that the UK HRT of £45,000 rises in line with inflation, as per UK legislation. The decrease in tax revenues, relative to the counterfactual, could be greater if the Chancellor instead decided to increase the HRT by more than inflation.

18. However, if a rate change is combined with a change in the corresponding income tax threshold, the impact may be higher, or lower, than what is calculated by simply adding up the ready reckoners. This is because there are interactions between rate and threshold changes.

19. A letter was issued on 14/09/2017 to each of the four opposition parties represented in Parliament stating that the Scottish Government planned to model their manifesto proposals, and asking them to notify us of any changes. Wherever possible, their responses are reflected in the modelling assumptions.

20. The Scottish Conservative manifesto

21. The Scottish Greens manifesto

22. See page 14 of the Scottish Labour Manifesto

23. The Scottish Labour Manifesto

24. The PA is therefore the same in all policy scenarios and the counterfactual (current regime in 2018-19).

25. For example, the UK Government could decide to raise the PA in line with inflation by £350, resulting in a saving of £70 for all Basic Rate taxpayers. This means that, under the Scottish Labour and Liberal Democrat proposals, individuals earning up to £18,800, around 30% of taxpayers, would not pay any more tax in 2018-19 than they did last year. However, it would also mean that a relatively greater proportion of individuals would benefit from the rise in the PA and hence pay less tax under the other parties’ proposals.

26. Household income also takes into account the number of people in a household through a process called equivalisation. This uses the common sense notion that for larger households, income has to be spread further than for households with fewer people. The change in equivalised annual income is shown at a household level. The analysis does not include the impact from Universal Credit since the rollout is still in its early stages.

27. 10 out of 35 OECD countries currently have 5 bands, including Canada, Belgium, Norway and Spain

28. These are the households most likely to be affected by the benefit freeze.

29. As before, a different approach would be to compare people’s tax liability across different years to account for any savings from the rise in the PA. This would increase the share of taxpayers who would pay less tax.

30. This is based on the Survey of Personal Incomes ( SPI) for 2014-15, the latest year for which data are available. The SPI comprises a detailed sample of over 40,000 anonymised Scottish tax records, weighted to be representative of all Scottish taxpayers.

31. No new data releases were included after 25 October.

32. The Scottish Fiscal Commission will provide an updated set of economic determinants at the time of the Draft Budget 2018-19.

33. The Draft Budget 2017-18

34. Box 5 in the Devolved Taxes Methodology Report sets out the calculations in detail.

35. Research by the Institute for Fiscal Studies (IFS)

36. The IMF Fiscal Monitor

37. The Family Resources Survey ( FRS) is collected annually by DWP. The FRS contains detailed information about household income and has a large Scottish sample (2,700 households in 2015-16) making it the best source of information on household income in Scotland.

38. Using September CPI inflation.


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