Scottish Budget 2024 to 2025: distributional analysis

Distributional Analysis to accompany the 2024-25 Scottish Budget

This paper provides an analysis of the impact of tax and social security measures included in the 2024-25 Scottish Budget on households of different income levels and characteristics.

Distributional analysis is critical to understand the impact that Scottish Government policies are having on inequality, and to ensure support is targeted at those who need it most.

Summary

This analysis shows:

• The Scottish tax and social security system is progressive: the higher a household's income, the greater the share of their income they pay in tax, and the less they receive in social security.
• Differences in Scottish and UK Government policies since the devolution of tax and social security powers in 2016 have increased this progressivity.
• As a result, on average, households in the lower half of the income distribution are £400 better off a year than they would be in the rest of the UK.
• Overall, around 58% of households are better off under the Scottish tax and social security system than they would be in the rest of the UK.
• Scottish tax policy decisions taken in this Budget – including both Income Tax policy changes and the freeze in Council Tax – provides a net benefit to around 60% of Scottish households, with around 80% of households paying no more tax as a result of these measures.
• The negative impact of Income Tax policy changes principally falls on the highest earning 20% of households, with the top 10% paying an average of 1% of their income (£1,041) more in Income Tax per year.
• Taking Scottish tax policy changes and the UK Government's reduction in National Insurance Contribution rates together, in 2024-25 over 90% of households will be better off than if rates had been left unchanged and all thresholds uprated with CPI (excluding the Personal Allowance and Top Rate Threshold).

A detailed description of the methodology used to produce this analysis is included in the annex of this note.

Scope of this analysis

The first part of this paper analyses the impact of the Scottish tax and social security system on household incomes. This is shown both in isolation and in comparison to the system in place in the rest of the UK.^[1] Understanding the impact of the tax and social security system as a whole is important context for considering the changes made in an annual Budget.

The second part of this paper analyses the policy changes announced or confirmed in this Budget, namely:

• A new 45p Advanced rate of Income Tax, applied on income between £75,000 and £125,140;
• Increasing the Top rate of Income Tax by 1p to 48p;
• Freezing the Higher rate threshold at £43,662;
• Freezing Council Tax in 2024-25, subject to the agreement of local government.

This modelling of the impact of the freeze in Council Tax assumes rates would otherwise have increased at the rate seen in 2023-24. The implementation of the freeze remains subject to negotiation with the Convention of Scottish Local Authorities (COSLA) and individual agreement with each Local Authority. This analysis is an illustration of the impact on households for 2024-25, based on the rate increases from 2023-24, and assumes that the freeze is agreed by all Local Authorities.

Both parts of this analysis only include policies that directly affect the financial resources available to households – i.e. personal taxes and cash benefits. It does not incorporate in-kind benefits (such as free school meals or free early learning and childcare), or the benefits of public services received by households, such as transport, education or healthcare. We are exploring extending our analysis to cover these benefits, and, if possible, intend to incorporate these in future Budget analyses.

All impacts on household incomes are shown excluding any behavioural responses. This is particularly important when considering impacts of tax policy on higher income deciles, where behavioural responses to policy changes are likely to be greatest.

A full list of policies incorporated is included in the methodological annex.