Tomorrow, the Scottish parliament will vote on the income tax changes proposed in the Scottish Government’s 2023–24 Budget. Together with other changes made to the income tax and benefit system over the past six years, these changes will make the tax and benefit system in Scotland considerably more progressive than that in the rest of Great Britain.

On average, the devolved income tax and benefit measures introduced since 2017 will decrease Scottish households’ incomes by £210 (0.5%). However, new benefits and top-ups to UK-wide benefits mean that, by April, the poorest tenth of Scottish households are set to have incomes £580 (4.6%) per year higher than they would under the system in England and Wales. Meanwhile, higher taxes will reduce the incomes of the richest tenth by £2,590 (2.1%) per year compared with the system south of the border.

These are among the key findings of Chapter 5 of the IFS’s inaugural Scottish Budget Report.

Changes since the devolution of income tax and benefit powers

Scottish income tax and benefits now differ from the rest of the UK in a number of important respects as a result of devolved policy decisions since 2017.

  • The Scottish income tax system has more bands and different rates compared with the rest of the UK. The effect is that income tax liabilities are a very small amount lower in Scotland for those on less than £28,000 per year, but greater for those on higher incomes – sometimes by quite large margins. For example, someone on £50,000 will pay £1,550 more tax in Scotland than in the rest of the UK, and someone on £150,000 will pay £3,900 more, in the coming tax year.
  • Scotland has introduced two significant new benefits for families with children: the Scottish child payment (£25 per week) and Best Start grants (three lump-sum payments when children reach a certain age) – targeted at lower-income households. Primarily as a result of these, amongst the poorest 30%, Scottish reforms to the income tax and benefit system are set to raise the incomes of households with children by around £2,000 per year on average. A typical out-of-work lone parent with two children now has their after-housing-costs income increased by 19% as a result of the Scottish child payment.
  • The Scottish Government is also replacing the UK government’s personal independence payment – a benefit for disability – with the ‘adult disability payment’. Differences in the assessment process are forecast to mean more claimants and longer claims. This is forecast to increase disability benefit spending in Scotland by around a fifth when rolled out. Because disabled people tend to have lower-than-average incomes and living standards, this change will further increase the progressivity of the tax and benefit system in Scotland.

Further detail on the latest changes

Benefit changes brought in last November, and the income tax changes being voted on imminently contribute significantly to these trends. On average, the new measures are a takeaway of £110 per year per household. The changes include:

  • freezes to the basic, intermediate and higher rate income tax thresholds, a cut to the additional rate threshold (all effectively following UK policy), and 1p increases in the higher and additional rates of tax to 42% and 47%, respectively, which will reduce the incomes of the top tenth by almost £1,400 per year (1.2%) in April 2023 compared with default uprating in line with inflation;
  • an increase in the Scottish child payment from £20 to £25 and an expansion of eligibility to cover children aged 6–15, both effective from November, which will boost the incomes by the poorest tenth by £260 per year (2%) on average compared with April 2022.

Tom Wernham, a Research Economist at IFS and an author of the report, said:

‘The Scottish government has used devolved income tax and benefit policy to make the system more progressive, as well as to raise more revenue to fund public services. These changes imply big increases in income for poorer households with children. But to fund their policies they are increasingly relying on taxing higher earners. With this group in particular, there is a risk that higher taxes will incentivise tax avoidance efforts, such as converting income into dividends – to which Scottish tax rates don’t apply – or even migrating across the border. Most of the additional revenue from raising the additional rate to 47p is set to be lost due to responses such as these – suggesting there is a limit to how much further this strategy can be pushed. If the Scottish Government does want to raise more revenue from richer households, it may need to turn to other taxes under its control, such as council tax.’