INCOME TAX CHANGES in the Scottish Government’s 2023–24 Budget, together with other changes made over the past six years, will make the tax and benefit system in Scotland considerably more progressive than that in the rest of Great Britain, says the Institute for Fiscal Studies (IFS).
On average, the devolved income tax and benefit measures introduced since 2017 will decrease Scottish households’ incomes by £210 (0.5 per cent). 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 cent) 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 cent) per year, compared with the system south of the border.
These are among the key findings of Chapter Five of the IFS’s inaugural Scottish Budget Report.
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 to 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 per cent, 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 per cent 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.
Benefit changes brought in last November, and the latest income tax changes, 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 per cent and 47 per cent respectively, which will reduce the incomes of the top tenth by almost £1,400 per year (1.2 per cent) 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 of the poorest tenth by £260 per year (two per cent) on average compared with April 2022.
Responding when the Scottish Budget measures were first announced at the end of last year, Ruth Boyle, Policy and Campaigns Manager at The Poverty Alliance said: “We welcome the decision to use our tax powers in a progressive way to get more investment for the compassionate Scotland that people want.
“We hope that this will be the beginning of the Scottish Government’s efforts to use the full range of tax powers at their disposal. In the longer-term, the Scottish Government must reform the basis of our tax system, including implementing the long-awaited reform of council tax, to ensure that our tax system has justice and compassion at its heart.”
The Scottish Trades Union Congress (STUC) has also pressed for more action from the Scottish Government on tax, land and assets, while welcoming steps in the right direction.
* Read: Analysis of Scottish tax and benefit reforms here.