Official Report 898KB pdf
Income Tax
To ask the Scottish Government what its response is to reported comments from the Institute for Fiscal Studies that its income tax increases on the highest earners may have reduced the revenue raised. (S6T-02197)
The IFS was clear that it did not have any definitive evidence of any suggested reduction in revenue raised from the highest earners in Scotland in recent years but that it welcomed our work on policy appraisal. An evaluation is being developed as part of our forthcoming tax strategy, which will be published alongside the budget and will help to ensure that we continue to take an evidence-informed approach to taxation policy.
The evidence shows that our tax base continues to grow strongly, with real-time information about pay-as-you-earn taxation showing that Scotland outperformed the rest of the United Kingdom on tax per head and on earnings growth in both 2022-23 and 2023-24. Scottish income tax policy for 2025-26 will be announced as part of the Scottish budget on 4 December.
I will quote directly from David Phillips of the Institute for Fiscal Studies, who said:
“increases in the top rate of tax are unlikely to raise much—with evidence from the first of Scotland’s reforms in 2018-19 suggesting that they may even reduce revenue.”
Those are his words, not mine, and those warnings from the Institute for Fiscal Studies should be a wake-up call to the Scottish National Party. For years, we have warned that continually increasing tax on the highest earners will be counterproductive. That same message has come from Scottish business, and we now hear that warning from the respected and independent Institute for Fiscal Studies.
Will the Scottish Government finally listen to all those warnings, put economic growth first in its forthcoming budget and commit to reducing the tax burden on hard-working Scottish families rather than further increasing it?
I repeat that the IFS is clear about the very high level of uncertainty around the behavioural impact of our tax policies. It is, of course, vital that we understand any behavioural change, which is why, as I said in my previous answer, we have funded His Majesty’s Revenue and Customs to undertake research on that topic.
If we look at the facts, we see that, from the introduction of Scottish income tax, in 2017-18, more taxpayers have come to Scotland than have left, with net inflows averaging almost 4,200 people a year, and that more high-earning taxpayers came to Scotland than left in 2021-22, which is the latest year for which we have data.
As for Murdo Fraser’s final comment about reductions in tax, the Scottish Conservatives have to show where that money would come from. Analysis that was published alongside the budget shows that a 1p cut to the intermediate rate, which the Tories seem to be pushing, would cost around £172 million—money that would not be available to go into public services. It is all very well to suggest tax cuts, but they have to be able to explain the other side of the coin, which is where those cuts would fall.
Having looked at the figures, the cabinet secretary will know that the population of Scotland is growing more slowly than the population of the UK as a whole, which suggests that there is an issue.
Does the cabinet secretary agree that any MSP—or even any former First Minister—who voted for these crippling and counterproductive tax hikes on higher earners and who then sets up a private company into which future earnings will be paid, potentially as a means of avoiding the higher taxes that they voted for, is guilty of the most outrageous hypocrisy?
On Murdo Fraser’s point about population growth, I note that that is why the Government has argued to have the full range of powers over migration—so that we can encourage people to live and work in Scotland. However, as I said in my answer to the previous question, more people are coming to live and work in Scotland, including higher earners.
I will share with Murdo Fraser some information from the Office for National Statistics bulletin “Low and high pay in the UK: 2024”, which shows that Scotland has among the lowest levels of low pay—it is second only to London—and the highest level of high pay after London and the south-east of England. That suggests to me very strong earnings performance, which is important for economic growth.
As for Murdo Fraser’s final question, I will not comment on anybody’s individual circumstances or position on such matters.
As has been referred to, HMRC research has indicated that, across all tax bands in 2021-22, more taxpayers chose Scotland as their home than left the country. Does the cabinet secretary agree that that highlights the fact that Scotland is an attractive place for people to live and work in, while the SNP Scottish Government’s progressive approach to taxation continues to raise an additional £1.5 billion to support vital public services by asking those who earn more to contribute more?
That is absolutely right. That latest research from the HMRC shows that, since the introduction of Scottish income tax, in 2017-18, net inflows to Scotland have averaged almost 4,200 people a year, which is more people coming to Scotland.
Our income tax policy protects the majority of households in Scotland while supporting investment in our public services, with the Scottish Fiscal Commission having estimated that our income tax policy choices since devolution will raise an additional £1.5 billion in 2024-25, which would not have been raised if we had matched UK Government policy. That money would be at risk with those who advocate tax cuts. It supports a wide range of social contracts, with the people of Scotland benefiting from a wide range of services and social security payments that are not provided anywhere else in the UK, including our flagship Scottish child payment, free prescriptions and free higher education.
I am sure that the minister agrees that setting tax rates is a delicate balance. Taking into account all the tax rises in recent years at UK and Scotland levels, does she believe, in principle, that there is tolerance and capacity for further tax rises here?
Obviously, I will set out the detail of the tax policy on 4 December, and we will publish the tax strategy alongside that.
I remind Willie Rennie that it is a delicate balance and that, in coming to the judgments that we will come to, we will look at everything in the round, including the steps that have been taken on tax so far by this Government and the actions that have been taken elsewhere. Those decisions are taken very carefully indeed. I want to make sure that the position that we land in is that a majority of taxpayers in Scotland continue to pay less than they would pay elsewhere in these islands.
The cabinet secretary is sounding complacent on the issue, because it is becoming increasingly clear that the Scottish Government’s high-tax policies risk undermining Scotland’s tax take.
Given that formal studies into the behavioural impact of tax changes on high earners, in particular, will reveal the problem only after the damage has been done, will the Government commit to developing rapid indicators to track the impact of its tax policies? Specifically, will it adopt the recommendations from the Institute for Fiscal Studies and commit to gathering and publishing monthly figures based on pay-as-you-earn information in tax submissions and releasing anonymised details of taxpayer address changes, so as to provide real-time information on the effects of the Government’s decisions on tax?
There is no complacency, but I would likewise expect members to look at the evidence. The evidence shows that our tax base continues to grow strongly, with RTI PAYE data showing Scotland outperforming the rest of the UK on tax per head and earnings growth in both 2022-23 and 2023-24. That may not be what Conservative members want to hear, but those are the facts.
I say to Craig Hoy that we have engaged in a lot of detailed work with HMRC because we want to monitor the data, including in relation to behavioural impact. The point is that the figures on earnings growth show a very strong base, which I thought would have been welcomed across the chamber.
The cabinet secretary argues that those who have the broadest shoulders—the highest incomes—in Scotland should pay more tax. Is she therefore concerned that the overall tax revenue from income tax is being reduced by some people—I mention no names—who choose to set up a limited company and who then appear to be able to insert into that company’s income income from, for example, book royalties or television appearances, thereby reducing their income tax liability and the amount of money for Scottish public services? Does she deprecate the use of that device?
I say to Fergus Ewing that our approach to tax is founded on core principles that ensure that everyone pays their fair share of tax. We support very strong measures to tackle tax avoidance and evasion.
We continue to work with HMRC through our service level agreement to ensure that Scottish income tax is collected efficiently and reliably. To date, there has been no evidence that Scottish taxpayers have been more likely to engage in non-compliant behaviour than those in the rest of the UK. We continue to monitor that closely with HMRC.
That concludes topical questions.
I will allow a moment or two for front-bench members to organise for the next item of business.
Air ais
Time for Reflection