HMRC Research - Impacts Of 2018 To 2019 Scottish Income Tax Changes On Intra-UK Migration And Labour Market Participati

28th April 2024

From the tax year 2018 to 2019, the Scottish Government introduced 2 new Income Tax bands, as well as increasing the rates for 2 of the existing bands. As a result, Scottish taxpayers on higher incomes experienced an increase in the proportion of income which is paid in tax, whilst taxpayers on lower incomes experienced a decrease in the proportion of income which is paid in tax.

In 2021, HM Revenue and Customs (HMRC) estimated the change in taxable income declared in Scotland in response to the introduction of the 5-band system in Scotland in 2018 to 2019. Our paper extends that analysis and attempts to estimate behavioural responses that relate to individuals withdrawing from the Scottish workforce completely. Specifically, we consider 2 key responses: changes in labour market participation and changes in intra-UK cross-border migration, which is defined as movements between Scotland and the rest of the UK (rUK).

For labour market participation, we compare Scottish taxpayers to a group of similar taxpayers from rUK where Income Tax rates remained the same. Taxpayers are grouped into 5 income bands based on their average yearly income before the introduction of the policy (from the tax year 2014 to 2015 to the tax year 2017 to 2018). These income bands are mostly aligned to the Scottish 5-band system, apart from the Higher (HR) and Top rate (TR) which are separated at £100,000 in order to increase the number of observations. For each income band, we measure the percentage point change in the proportion of the population in work, from the year before the policy was implemented to the year of and the year after implementation.

For intra-UK cross-border migration, we group individuals into income bands based on their income in the year before the policy change (2017 to 2018). These income bands are aligned to the Scottish 5-band system. We only include individuals working in each year of the data. For each income band, we measure the percentage point change in the proportion of the population migrating from the year before the policy was implemented to the year of and one year after implementation. Given that different income bands experienced varying degrees of changes in the proportion of income retained after tax, we compare taxpayers in one income band to similar taxpayers in another income band that experienced a different change in the proportion of income retained after tax.

We use HMRC's Real Time Information (RTI) Pay As You Earn (PAYE) and Self Assessment data and measure labour market participation and cross-border migration changes separately. We estimate the percentage point change in the probability of participating or migrating relative to a 1% change in the proportion of income retained after tax (also known as the average rate of retention or ARR, which is equivalent to 100% minus the average tax rate or ATR). This is known as a semi-elasticity.

We find no evidence of a change in labour market participation following the Scottish Income Tax changes. The semi-elasticity estimates, which capture the percentage point change in labour market participation relative to the percentage change in the ARR, are not significantly positive. The estimates are generally close to 0 but the confidence intervals are in most cases wide suggesting that the results may not be precise. Therefore, while our results suggest no changes in labour market participation following the Scottish Income Tax changes, we conclude that the true changes are uncertain and that we have not been able to detect if there was a change. We consider limitations to the analysis in the discussion section (6.6).

We find some evidence of a decrease in net cross-border migration to Scotland for taxpayers earnings above the Higher rate threshold (HRT) following the Scottish Income Tax changes. The semi-elasticity estimates, which capture the percentage point change in net cross-border migration relative to the percentage change in the ARR, are approximately 2.56 for taxpayers above £500,000 in taxable income and 0.19 to 0.44 for taxpayers below £500,000 in taxable income in 2018 to 2019 (the year of the policy change). The semi-elasticities are generally increasing with income.

A semi-elasticity of 2.56 means that for a 1% decrease in the ARR of taxpayers earning above £500,000 you might expect to see a 2.56 percentage point increase in the probability of Scottish taxpayers earning above £500,000 moving from Scotland to rUK. For all Scottish taxpayers above the HRT, we estimate that our results correspond to approximately 1,030 taxpayers or £61 million in Scottish non-savings non-dividend (NSND) tax receipts moving from Scotland to rUK.

Our results are consistent with the academic literature and the findings remained fairly stable when adopting different methodological approaches. While the semi-elasticities are statistically significant, the confidence intervals are generally wide suggesting some uncertainty in the precise magnitude of the estimates. Additionally, the results are only reliable to the extent to which they are driven by the Scottish Income Tax changes in 2018 to 2019. Limitations to the analysis are considered in the discussion section (7.6).

We find no conclusive evidence of persistence in the changes in cross-border migration. The headline semi-elasticity estimates are generally insignificant in 2019 to 2020 (one year after the policy change). For individuals on lower incomes, we find no conclusive evidence of changes in cross-border migration following the Scottish Income Tax changes as there is a lot of variation in the results when adopting different methodological approaches.

Read the full report HERE