Net taxpayer migration to Scotland increases since introduction of Scottish income tax rates

Net migration from the rest of the UK into Scotland has increased since the introduction of the Scottish rate of income tax, a new paper from HMRC has found.

Since new rates and bands were set in 2018-19, there has been higher migration to Scotland for basic rate taxpayers, additional/top rate taxpayers and those with income under the personal allowance threshold.

The migration of higher rate taxpayers has been relatively equal in most years, though a separate paper from the HMRC suggests there was evidence of a decrease in net migration of this group to Scotland in the first year of the change.

Deputy First Minister Shona Robison welcomed the findings, saying it proves Scotland is an “attractive place for people to live and work” despite the difference tax rates.

The Scottish Government moved to create a more progressive tax system in 2018 but creating two new bands – the starter rate for those earning less than £13,850 and an intermediate rate for those earning more than £24,001.

Those on the starter rate pay a penny less per pound in tax than those on the basic rate, while people on the intermediate rate pay a penny more.

Higher rate and top rate payers also paid a penny more than elsewhere in the UK, while the threshold for the higher rate was lower than in the rest of the UK.

The HMRC study, which compared cross-border migration figures from before the change to after, found a gradual increase in the numbers of taxpayers moving to Scotland since 2017, with the most significant increase seen between 2020 and 2022 in part due to the pandemic.

The proportion of income moving from rUK to Scotland was around 0.08 per cent, while the proportion of income moving from Scotland to the rest of the UK was 0.9 per cent.

The slight increase in the number of higher taxpayers moving out of Scotland in 2018-19 is estimated to have resulted in £61m in tax receipts going to the UK Government instead of the Scottish Government.

But the changing pattern of migration between 2019-20 and 2021-22 resulted in overall net positive income movement to Scotland.

In 2021-22, the most recent year of available data, £200 million in additional taxable income was brought into Scotland.

But the HMRC study says it could not draw “definitive conclusions” on whether the reason for the migration trend is tax difference.

“We cannot observe the counterfactual situation where tax divergence did not occur, we cannot conclude the policy change had no effect,” it said.

Robison, who is also finance secretary, said: “We welcome this research, showing a steady increase in net taxpayer migration in the years after Scottish income tax was introduced.

“The latest figures show that across all tax bands and almost all age ranges in 2021-22, more taxpayers chose Scotland as their home than left – offering yet more proof that Scotland is an attractive place for people to live and work, while our progressive approach to income tax asks those who earn more to contribute some more.”

The Scottish Conservatives have accused the government of “desperate spin” as the study does not take in the most recent changes which have widened the tax gap between Scotland and the rest of the UK.

In the most recent budget for 2024-25, the finance secretary introduced a sixth income tax band between the higher and top rate called the advanced rate.

From this month, the starter, basic, intermediate and higher rates of tax remain the same as last year at 19 per cent, 20 per cent, 21 per cent and 42 per cent, respectively.

The new advanced rate, for income between £75-125,000, is 45 per cent. The top rate, which kicks in at income over £125,140, is 48 per cent.

For earners in the rest of the UK, there are three income tax bands – the basic rate for income up to £50,270 at 20 per cent; the higher rate on £50,271 to £125,140 at 40 per cent; and the additional rate on earnings above £125,140 at 45 per cent.

Tory finance spokesperson Liz Smith said: “The study specifically says it can’t ‘draw definitive conclusions’ about workers’ movement. It warns that increased rates could have a significant impact but that obviously does not fit the SNP’s narrative.

“And it predates the SNP’s devastating recent tax-and-axe budget, which has been widely viewed as the tipping point in the growing tax gap between Scotland and the rest of the UK.

“Virtually every business group has identified that tax gulf as a serious disincentive, which will hold back the economic growth essential to fund public services. They were clear that the current levels, not addressed by this report, were actively impacting on Scotland’s ability to recruit and retain key workers.”