Fiscal Policy and Tax, Scottish Economy

Weekly update: HMRC income tax research and the effect of tax on labour supply and decisions on location

It’s been quite the end to the week in Scotland – and particularly in metonymic Holyrood – but we thought we’d take you through some discussion of a less flashy but certainly not less important topic for Scots.

On Wednesday, HMRC published two interesting pieces of research looking at income tax across the UK, specifically focussing on intra-UK migration and on labour market participation. This is particularly interesting given the live debate in Scotland regarding the impact of tax rates and additional tax bands.

Scotland has been gaining taxpayers from the rest of the UK – and so has Wales

The first publication contains analysis of a new dataset comprising taxpayers’ income and location movements across the UK, covering the years 2009-10 to 2021-22.

Charts: Taxpayers moving to/from Scotland (top) and Wales (bottom) relative to the rest of the UK

Source: HMRC

Scotland has in the past few years moved from essentially zero net migration of taxpayers with the rest of the UK in the years to 2017 to nearly 10,000 in 2021-22. But what is also interesting is the fact that the same pattern emerged in Wales.

It’s obviously impossible to know what would have happened otherwise, but this common trend most likely means that that there might be an underlying factor here. In fact, this pattern might well be reflected across regions of England relative to London and perhaps other big cities. The timing of the acceleration around the height of the pandemic would also be consistent with some of the anecdotal evidence about places like London losing some population then. But it’s a lot harder for HMRC to do this analysis at a regional level in England, whereas Scottish and Welsh taxpayers have a different tax code which simplifies the work considerably.

The migration pattern of 25 to 34-year-olds is the biggest change in the past 5 years

And it’s a change that has occurred across Scotland and Wales, which again seems to indicate an underlying factor and not necessarily than anything directly to do with each of the two devolved nations. It’s a pretty big change, going from net negative to net positive over the past few years.

Charts: Net movement of taxpayers to Scotland (top) and Wales (bottom) from the rest of the UK by age band

Source: HMRC

Scotland has continued to generally have negative net migration of under 25s (that is, more moving out than in), which is a well-established pattern – 2021-22 showed a reduction in numbers, but it’s too early to tell whether that’s normal variation or something else. And there has also been an acceleration in the movement of those aged 35 to 64 to Scotland and Wales.

But descriptive statistics alone can’t tell us the effect of tax policies

It might seem at first glance that these statistics mean that the changes to the structure of income tax in Scotland in 2018-19 haven’t had an effect in the number of people moving to Scotland. But these alone cannot tell us that, because the questions is whether, on net, fewer people than otherwise would have been the case have moved to Scotland.

To attempt to answer that question, HMRC have released a second publication, this one particularly looking at the impact of those reforms, and to which we contributed by providing peer review. The paper focusses on two areas: whether the reforms had an effect on labour market participation, and whether they had an effect on movement of people to and from Scotland relative to the rest of the UK.

The key point is that analysing the effect of these reforms requires establishing what would have happened in their absence, which HMRC does by comparing those affected by the policy with those unaffected which have the most similar characteristics. This is a methodology adapted from US studies looking at cross-state movements, and generally considered one of the most robust ways of estimating what are pretty complex effects.

In terms of participation in the labour market, HMRC found no statistically significant effect. This is true for those who paid more income tax in Scotland, as well as those who earn less and therefore pay less in Scotland than they would at rates prevailing in the rest of the UK. This is consistent with what we’d expect, and with the Scottish Fiscal Commission’s assumptions when costing income tax policies – most of the effect comes from people choosing how many hours to work and whether to search for higher compensation, rather than from the decision of whether to work or not.

In terms of intra-UK migration, HMRC do find a statistically significant effect in 2018-19, amounting to around 1,000 fewer taxpayers in Scotland above the higher rate threshold than would otherwise have been the case – mostly through people moving out of Scotland. This means around £60m of tax receipts went to the UK Government instead of the Scottish Government, and therefore would have increased the behavioural response. Note that this does not mean that the policy of raising income tax as a whole did not raise money – but it did so by less than was anticipated because of this effect.

The effect is particularly large for those at the very top of the income distribution (earning over £500,000 a year). This is obviously a very small pool of people, but one from which a lot of tax would have been collected as nearly all their income is taxed at a rate nearing 50%, and therefore a small number of people can have a large effect on revenue collected – for those earning above £500,000 a year, HMRC’s estimate of the amount moved from Scottish Government to UK Government revenues per individual at around £600,000.

The confidence intervals of the estimates are relatively large, which is not particularly surprising – this is hard to do, and we would normally expect that there might be no significant effect to be identified. So the fact that there is one is noteworthy in and of itself.

That being said, there are a few caveats to note. One is that the effect is only statistically significant in 2018-19, and not in 2019-20. This might mean that people moved their residence out of Scotland in anticipation of the move, but might have decided to return subsequently if they weren’t as affected as they might have thought. Or the effect might have been small enough by 2019-20 that the study doesn’t have enough statistical power to identify it.

We also don’t know if there are other confounding effects in 2019-20 which might have contributed to the results. And of course, this doesn’t account for the effects of any of the more recent changes to income tax policy in Scotland since 2018-19.

But we welcome this as the first step towards building an evidence base for the effects of differences in income tax rates and thresholds across parts of the UK, and we hope more will come in terms of assessing subsequent policies and the length of these effects.


João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute. Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK's public finances and on the effect of economic developments and fiscal policy on the UK's medium-term outlook.