In this paper, we take a comprehensive look at the evolution of the significant and widening gap in the amount of income tax paid per person in Scotland and Wales relative to the UK as a whole, exploring the drivers behind the changes in order to identify trends that should be factored into our devolved income tax forecasts. We primarily do this by using data from HMRC’s Survey of Personal Incomes covering the 14-year period from 2007-08 onwards. We split this into four different income sources and then decompose year-on-year changes into changes in overall and taxpayer populations, and in income tax per taxpayer. For employment income, the biggest driver of the changes, we also assess the respective roles of average earnings and their tax-richness, and composition by sector, age and highest qualification.

Overall, our analysis is supportive of our current approach to forecasting Scottish and Welsh income tax revenues in primarily focusing on employment income via HMRC’s monthly real time information (RTI) on PAYE earnings. As there are few supporting information sources on the other forms of income, this therefore remains a source of uncertainty for our forecasts. Other areas for further investigation include monitoring the emerging data on the composition of employee earnings in Scotland and Wales compared to the UK as a whole, and exploring whether changes in UK Government policy have contributed to the divergence in income tax paid per person.