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.
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 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 administrations since our previous forecast.
- We align our forecast to the latest annual receipts outturn data.
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 2021 Budget is the increase in the main rate of corporation tax (CT) from 19 to 25 per cent from April 2023. This reduces the incentive to incorporate by narrowing the gap between the CT rate and the higher and additional rates of income tax, generating additional receipts for each of the UK’s income tax regimes.
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