Scottish Income Tax: 2018-19 policy evaluation

1. Executive Summary

• In 2018-19, the Scottish Government introduced significant reforms to Scottish Income Tax, adding two new bands to split the previous Basic Rate band and adding 1p to the Higher and Top Rates. This represented the first major change in Income Tax policy since the current powers were devolved by the Scotland Act 2016.
• These reforms built on the policy changes implemented in 2017-18, where the freeze to the Higher Rate Threshold meant that, for the first time since the creation of Income Tax in 1799, some people in Scotland paid a different amount of tax from the rest of the UK.
• The purpose of this policy evaluation is to review the impacts of the 2018-19 Income Tax policy. The impacts are assessed against the outcomes defined by four key tests for Income Tax policy, initially set out in the discussion document The role of Income Tax in Scotland's budget.
• Overall, the policy met all four tests, which were:
• Revenue test – the Scottish Income Tax system raised around £240 million more for funding public services in Scotland compared to implementing the rates and bands of UK Income Tax.
• Progressivity test – the policy was progressive across large parts of the income distribution, resulting in a small reduction in inequality, as measured by the Gini coefficient (a fall of 0.3 percentage points).
• Protecting lower earners test – lower earners saw the tax they paid fall – with 56% of taxpayers paying less tax.
• Economic growth test – the policy provided additional funding to support the economy, protecting our public services and helping make Scotland fairer.
• In addition to the four tests, the Scottish Government also sought to understand the operational and administrative impacts of the policy. In doing so, we found that:
  • the processes and procedures put in place by HMRC to administer Scottish Income Tax are robust and enable it to be collected efficiently and effectively.
  • while the policy change made the tax system more complicated for some taxpayers, the use of software and technology significantly lessened the impact of the additional complexity.
  • good communication around tax policy and administration is key, particularly for unrepresented taxpayers and businesses.