Tax by tax, spend by spend

Devolved aspects of income tax

This Forecast in-depth page has been updated with information available at the time of the March 2024 Devolved tax and spending forecast.

We produce forecasts for Scottish income tax and the Welsh rates of income tax, levied on non-savings, non-dividend (NSND) income, assessed on a liabilities basis. This includes earnings from employment, self-employment, pensions and property. Income tax paid on savings and dividends is reserved to the UK Government and accounts for around 10 per cent of total income tax revenue at the UK level, and somewhat less than that in Scotland and Wales.

An individual’s taxpayer status is determined by the location of their main place of residence for the majority of the tax year. It is the individual’s responsibility to provide this information to HMRC.

  Scottish income tax

Income tax was partially devolved to Scotland in April 2016 and the Scottish Government has received full NSND income tax liabilities from taxpayers in Scotland since April 2017. The Scottish Parliament has the power to change rates and thresholds (other than the personal allowance) and to create new bands and rates, which it has done. HMRC still administers and collects the tax but the revenue is sent to the Scottish Government. Individuals who are classified as Scottish resident are given an ‘S’ flag on their HMRC tax identifier.

While the personal allowance (PA) remains a reserved power, the Scottish Government is able to introduce a new zero-rate band above the PA threshold, should it wish to, thereby generating an ‘effective’ PA that is higher than that in the rest of the UK.

Scottish taxpayers face a more progressive income tax schedule than those in the rest of the UK. The five rates and thresholds for 2024-25 are:

  • a 19 per cent ‘starter rate’ on earnings between £12,571 and £14,732;
  • a ‘basic rate’ of 20 per cent on earnings between £14,733 and £25,688;
  • an ‘intermediate rate’ of 21 per cent on earnings between £25,689 and £43,662;
  • a 42 per cent ‘higher rate’ on earnings between £43,663 and £125,140 (and between £43,663 and £75,000);
  • a 45 per cent ‘advanced rate’ (implemented from April 2024) on earnings above £75,000; and
  • a 48 per cent ‘top rate’ on earnings over £125,140, which roses from the previous 47 per cent.

The marginal tax rates faced by Scottish taxpayers compared to those in the rest of the UK are displayed in the chart below.

Figure 1: Marginal tax rates on NSND income in 2024-25

The chart below compares the proportion of taxpayer income by income bands in Scotland to the UK as a whole, based on HMRC’s 2019-20 Survey of Personal Incomes (SPI). Compared to the UK, the proportion of taxpayer income attributable to individuals with incomes below £50,000 is higher in Scotland. That pattern is reversed for incomes over £50,000, and particularly for those earning over £150,000.

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  Welsh rates of income tax

Income tax has been devolved to the Welsh Senedd since April 2019, but with fewer powers than in Scotland. The Welsh rates represent the first 10p in the pound for the tax bands that are set by the UK Government, and these must be set each year by the Welsh Government. There is no power to change thresholds or create new bands. HMRC administers and collects the Welsh rates, sending the revenues to the Welsh Government. Those individuals identified as Welsh residents are given a ‘C’ flag by HMRC.

The Welsh Government has thus far set a 10p rate for each band, thereby keeping the Welsh rates aligned with those in England and Northern Ireland. The combined rates and thresholds for a Welsh taxpayer in 2024-25 are:

  • a 20 per cent ‘basic rate’ on earnings between £12,571 and £50,270;
  • a 40 per cent ‘higher rate’ on earnings between £50,271 and £125,140; and
  • a 45 per cent ‘additional rate’ on earnings above £125,140.

This arrangement means that the income tax liability of a Welsh taxpayer is split between the Welsh and UK Governments. For a basic rate taxpayer who earns all their income from employment, the income tax liability is split equally between the two Governments (10 percentage points each). For higher-earning individuals the UK Government retains a greater share. For example, someone earning £250,000 (solely from employment income) would accrue a total tax liability of £93,235. Of this, £20,000 (21 per cent) relates to the Welsh rates while £73,235 (79 per cent) goes to the UK Government. If some of this individual’s income came from a non-devolved source, such as dividends, then the amount relating to the Welsh rates would be lower still.

The chart below compares taxpayers by income band in Wales to the UK as a whole. It shows a similar pattern to the Scottish-UK comparison, though there is a greater concentration of taxpayers in lower income bands in Wales, and a smaller proportion of taxpayers with incomes over £50,000.

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  Methodology

Our forecasts for Scottish income tax and the Welsh rates are calculated by taking a share of our UK forecast for NSND income tax liabilities. This is largely because we lack sufficiently detailed or timely data to produce a full economic forecast for either Scotland or Wales, which we would need to drive an income tax forecast.

We provide an in-depth guide to how we forecast devolved income tax in a working paper that we published in 2023. In summary, the three main steps in generating our income tax forecasts for Scotland and Wales are:

  • first, we generate a UK forecast for NSND income tax liabilities from the full UK income tax forecast;
  • second, we calculate the Welsh and Scottish shares of the UK NSND liabilities and apply these to the UK forecast; and
  • third, we add the effects of any new UK Government policy measures.

UK NSND income tax forecast

The UK forecast for NSND income tax liabilities is derived by subtracting tax receipts generated by savings or dividend income from the full UK income tax forecast. The main components of this forecast are:

  • Total PAYE liabilities. The PAYE tax receipts forecast is generated by applying appropriate tax rates to our forecasts of employment and earnings. The rates are estimated using HMRC’s Personal Tax Model (PTM) – a micro-simulation model based on the SPI. The PTM estimates the effective tax rate on wages and salaries and calculates the average marginal tax rate on additional income, accounting for inflation, reliefs, allowances, and any differences in growth across the earnings distribution. It then applies the forecast rates to income growth to generate the PAYE forecast.
  • SA liabilities on NSND income. The SA income tax forecast splits historical tax return data into key NSND income streams, such as sole traders’ profits and income from land and property. These are projected forward with relevant determinants from our economy forecast, including average earnings, employment and inflation. The SA liabilities forecast is generated by applying an effective tax rate sourced from the PTM.
  • PAYE repayments and repayments to pension providers, from our income tax repayments forecast.

Scottish and Welsh shares of income tax

The initial shares are those implied by the latest SPI data, which are then adjusted for the following:

  • Population: we use an index, based on the latest ONS population projections, to reflect relative differences in the expected growth of the adult pensioner and non-pensioner populations in Scotland and Wales compared to England.
  • Earnings from HMRC’s real-time information (RTI) from the PAYE system: RTI allows us to adjust the shares in line with more up-to-date data for most income taxpayers.
  • Changes from the recosting of previously announced UK Government policies.
  • The inclusion of new policies that have been announced by the devolved governments since our previous forecast.
  • We align our forecast to the latest annual receipts outturn data.

Post-measures forecast

  • To produce our post-measures forecast we add any effects on devolved receipts from UK Government policies announced since our previous forecast. An example from the March 2024 Budget is the cut to the main rate of Class 1 National Insurance Contributions (NICs) from 10 to 8 per cent from April 2024. We expect this to generate extra income tax revenue in each of the UK’s tax regimes through behavioural responses, for example, by incentivising more individuals to move into work.

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  Latest forecast

Our latest forecasts for Scottish income tax and the Welsh rates were published in March 2024 and are shown in the table below. We expect receipts to rise in each year of the forecast, reflecting the path for UK NSND receipts. This is largely driven by growth in the level of employment, which affects the number of taxpayers. Overall, we expect receipts to grow broadly in line across Scotland and the UK as a whole. While growth has historically been weaker in Wales, recent upward revisions in Welsh population projections keep the growth rate for the Welsh forecast closer to that for the UK as a whole.

Table 1: Latest forecasts for Scottish income tax, the Welsh rates of income tax and UK NSND income tax

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Other devolved taxes