Funding gap of £204m flagged in Scottish income tax reports

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Justine Riccomini discusses the shortfall on the amount originally forecast when the Scottish Income Tax 2017/18 outturn report was released by HMRC.

Recent HMRC figures have outlined that despite some Scottish taxpayers paying more in income tax, the Scottish government received less than was originally forecast for 2017/18.

HMRC’s Scottish Income Tax: Experimental Statistics report tells us that the number of non-savings/non-dividend (NSND) income taxpayers in Scotland actually decreased by 0.6% compared to an increase in the rest of the UK of 0.5%. Scottish Income Tax revenues reduced by £941m, leaving a funding gap of £204m for that year.

This, combined with news that Scotland’s economy appears to have grown more slowly than that of the rest of the UK, will be hard to ignore for Scottish politicians.

A bit of background

The Scotland Act 2016 devolved additional tax-raising powers to Scotland, which enabled Scotland to set the rates and bands of Scottish Income Tax. Scottish Income Tax is charged on NSND income, whilst savings and dividend income remains reserved to Westminster and is charged at UK rates.

The rates and bands of Scottish Income Tax now vary to those set for the rest of the UK, such that in 2017/18 the higher rate threshold for Scottish taxpayers was set lower than in the rest of the UK and in 2018/19, five income tax bands were introduced, which favours the lower-earning taxpayer population and taxes individuals more progressively as income rises.

The Scottish government now finds itself to be funded in two ways: partly by UK government block grant and partly by devolved and partly devolved (as in the case of Scottish Income Tax) tax revenue.

There is also capacity for some borrowing. The Smith Commission report foreword states: “Complementing the expansion of its powers will be a corresponding increase in the Parliament’s accountability and responsibility for the effects of its decisions and their resulting benefits or costs.”

The Fiscal Framework, which is the agreement reached between the Scottish and UK governments, sets out how this works in practice.

Income tax receipts from 2017/18

The Fiscal Framework agreement and its interplay with the forecasting and subsequent reconciliation of Scottish Income Tax and block grant adjustments together led to the following process in relation to 2017/18, which impacts funding in 2020/21:

  • Scottish Income Tax revenues for 2017/18 were forecast by the Scottish government (now they are forecast by the Scottish Fiscal Commission).
  • The amount to be deducted from the block grant in respect of Scottish Income Tax was calculated by reference to the Office for Budget Responsibility income tax forecasts.
  • When the 2017-18 outturn data became available from HMRC’s Annual Report and Accounts (published in July 2019), the Scottish Government’s income tax revenues and block grant deduction were recalculated.
  • The difference between the forecasts and the outturns are then applied to the Scottish government’s funding for 2020-21.
  • Using this methodology, the block grant for 2020-21 will be increased by £737m whilst the Scottish Income Tax revenues will be reduced by £941m – leaving a funding gap of £204m for that year.

HMRC was careful to point out in its 18 July 2019 release that the statistics are “experimental” – that is, due to the newness of the regime they are still in a developmental stage.

That said, it is hard to ignore the fact that Scotland’s economy appears to have grown more slowly than that of the rest of the UK, a situation which both the Scottish Fiscal Commission and Fraser of Allander Institute have picked up on in their recent reports.

Scottish taxpayers

The HMRC report tells us that the number of NSND income taxpayers in Scotland actually decreased by 0.6% compared to an increase in the rest of the UK of 0.5%. The reasons for this are likely to be numerous - from lower-earning Scottish Taxpayers being taken out of tax, to an increase in gig economy workers working ‘off-payroll’ through intermediaries.

Interestingly, the report shows that those 0.6% less Scottish taxpayers paid 1.8% more income tax in the 2017/18 tax year. That said, the net shortfall of £204m arises out of the interaction with the block grant adjustment, which is partly calculated on the basis of Scotland’s performance in relation to the rest of the UK. The Scottish Parliament Information Centre (SPICe), which is independent of the Scottish Government, discusses this in its latest blog.

Forecasting fallibility

The main difficulty is that the outturn figures are not available until two years later, resulting in a cyclical enduring catch-up process of reconciliation. The two-year wait is largely down to Self-Assessment and production of the Survey of Personal Incomes statistics time lag. This process does little to improve transparency around Scottish Income Tax for the taxpayer.  

Fiscal Framework

The Fiscal Framework as outlined above sets out to cater for a “no detriment” arrangement for the Scottish purse – but the Fiscal Framework is due to be reviewed towards the end of 2019 – and it remains to be seen what will be agreed at that point, with devolution now well underway. The current agreement was originally drafted in anticipation of the devolution of the 2016 tax powers.


Despite more income tax having been paid by some Scottish taxpayers, the Scottish government received less in Scottish Income Tax than was originally forecast for 2017/18. This, together with the rolling reconciliation process, will not make it easy for the public to understand their tax contributions.

Scottish Ministers are authorised to borrow up to £1.75bn and retain a reserve of £700m to aid fiscal flexibility.

However, it seems obvious that if Scotland wishes to raise further revenue to maintain continuity of existing public service provision, it must expand its taxpayer base – preferably at the higher and additional rate end. Economic growth and higher-paid jobs seem to be the most popular solutions put by commentators.

About Justine Riccomini

Justine Riccomini

Justine is head of taxation (Scottish taxes, employment and ICAS tax community) at ICAS. She joined the ICAS tax department in November 2016 and is secretary to the Scottish taxes committee and the employment taxes working group. Prior to this, Justine has specialised in employment taxation and HR management, with the last five years spent running her own consulting business in conjunction with two projects as a senior policy advisor at the Office of Tax Simplification. Her 19 years in practice was preceded by ten years at HMRC.


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