Fiscal framework outturn report: 2024

3. Income Tax

24. Since April 2017, the Scottish Parliament has had the power to set rates and bands for non-savings, non-dividend Income Tax. This includes earnings from employment, self-employment, pensions and property. The responsibility for defining the Income Tax base, which includes the setting or changing of Income Tax reliefs and exemptions, and the tax-free Personal Allowance, remains reserved to the UK. For any income people get from savings or dividends, the rates and bands are also set by the UK Government. Scottish Income Tax is therefore a partially devolved tax.

25. For Scottish Income Tax, outturn data is normally available around 16 months after the end of the financial year and a single reconciliation is applied to the following Budget, three years after the original Budget was set. For example, the reconciliation relating to Income Tax in the 2019-20 financial year was applied to the 2022-23 Budget.

26. Final outturn data for 2022-23 Income Tax was published by HMRC on 11 July 2024^[4]. This data has been used to calculate the reconciliations to the Scottish Government’s Block Grant, which will be applied to the 2025-26 Budget. Table 2 shows the data, together with the net effect on the Budget.

27. This translates into a £448.7 million positive reconciliation requirement that will be applied to the 2025-26 Budget (see section 8 for a full breakdown of reconciliations for the 2025-26 Budget).

28. The forecast for 2022-23 Income Tax revenue compared to the corresponding BGA was originally expected to have a negative net effect on Scotland’s finances at the time of setting the 2022-23 Budget, with BGAs forecast to exceed revenues by £190.2 million. The outturn data shows the revenues exceeded the BGA by £258.5 million. This translates into a £448.7 million positive reconciliation, which will correct for the forecast error at the 2022-23 Budget. This is a normal part of the Fiscal Framework and the application of reconciliations should not be interpreted as a reflection of the underlying performance of the Scottish or equivalent UK tax base.

29. This is now the largest Income Tax reconciliation payment for forecast error to date, however, like last year this was not unexpected as the original Budget forecasts were produced while the UK was still being affected by the Covid-19 pandemic, and the initial forecasts could not anticipate higher prices, driven in part by the invasion of Ukraine. This was a time of unprecedented economic uncertainty, and forecasts were therefore subject to a much greater degree of error.

30. The SFC estimate that Income Tax policies implemented since 2017-18 have raised up to around £881 million in 2022-23, when compared with matching Income Tax policy in the rest of the UK. However, relatively weaker economic performance alongside differences in the income distribution have partly offset this. Therefore, the overall benefit of Income Tax devolution to the Scottish Budget in 2022-23 is the aforementioned £258.5 million.

31. Like last year’s reconciliation there is significant volatility in the forecasts produced in between the budget setting forecasts and final outturn. This will in part reflect that the net position is the difference between the forecasts of two large numbers (Scottish income tax and the BGA), and, therefore, small changes in either forecast can result in large changes in the net position. The forecasts were revised up largely as a result of changing macroeconomic drivers such as inflation and earnings growth, with the final adjustment to outturn largely resulting from data revisions. This is illustrated in Figure 1.

32. The outturn data for Income Tax 2023-24 and 2024-25 should be available in summer 2025 and 2026 respectively, with reconciliations then being applied to the 2026-27 Budget and 2027-28 Budgets.

33. Estimates of future reconciliations for the financial years 2023-24 and 2024-25 are directly derived from latest SFC and OBR forecasts. They have a direct bearing on the Scottish Government’s multi-year funding envelope as they inform decisions on future resource borrowing and spending.