We have previously looked at the latest release of the Annual Survey of Hours and Earnings (ASHE) on this blog. With the date now set for the Scottish budget, it is helpful to revisit this data to see what it can tell us about the income distribution in Scotland. A large proportion of the Scottish Budget is now derived from non-savings, non-dividend income tax revenue, meaning that the Parliament’s decisions on income tax policy directly affect how much money is available for public services.
A quick bit about the data
ASHE uses Pay As You Earn (PAYE) data to identify representative sub-groups of employers and employees who are surveyed for information on employee hours and earnings. As the data is based on PAYE, it doesn’t include data on the self-employed.
ASHE also provides earnings by decile. This means that it provides estimates on the nine points which split the data into 10 equal numbers of employees. For example, the first point given for Scotland is £8,400, meaning that 10% of employees in Scotland earn less than £8,400 a year.
Scottish income tax comes from those who live in Scotland rather than those who work here. We have looked at the ASHE information on pay by place of residence as this will allows us to look a pay for those live in Scotland.
While the data is estimated and doesn’t include information on earnings for the self-employed, it allows us to get an idea of the earnings distribution and the potential implications for income tax revenues.
As Scotland’s tax policy differs from the rest of the UK (rUK) it is of interest to compare the income distribution in Scotland with rUK. ASHE doesn’t provide figures for rUK specifically, but it does provide data for the whole of the UK and a combined figure for England and Wales. Therefore, we have compared the Scotland figure to the UK and to the combined England and Wales figure.
How does Scotland’s income distribution compare to the UK?
In Scotland the point at which the top 10% of earners starts is £49,953, compared to £55,000 in England and Wales and £54,180 in the UK overall. While at the bottom of the distribution the bottom 10% earns below £8,400 in Scotland compared to £8,160 in both England and Wales and the UK overall. This means that Scotland has a narrower distribution of earners than England and Wales and the UK overall.
How has this distribution changed since 2016?
The above chart shows that the point which defines the bottom 20% of earners in Scotland has increased by 8.5% between 2016 and 2019. This is the same as for the UK overall, while for England and Wales it has increased by 8.3%. The point defining the bottom 20% of earners in Scotland is also slightly higher than both the UK and England and Wales.
The starting point for the top 10% of earners in Scotland has grown by 7.3% between 2016 and 2019 compare to 7.9% for the UK and 8.1% for England and Wales. This means the that gap between the starting point for the top decile in Scotland and the UK and England and Wales has widened since 2016.
How does the distribution compare to the tax policy for the highest earners?
The above chart shows how growth for the starting point for the the top decile has changed in Scotland, England and Wales and the UK, and the change in the rUK and Scottish higher rate tax threshold.
While the rUK higher rate tax threshold has increased from £43,000 to £50,000 between 2016 and 2019, the Scottish higher rate tax threshold has only increased from £43,000 to £43,430.
In addition, despite the starting point for the top decile in Scotland having seen slower growth than the UK and England and Wales, it has outstripped the growth in the Scottish higher rate tax threshold.
Taken together, these factors mean that Scotland has a higher proportion of employees covered by the higher rate of tax than the rest of the UK.
This is reflected in the latest UK Income Tax Liabilities Statistics from HMRC. They estimate that in 2019-20, 16% of taxpayers in Scotland will be paying the higher rate of tax compared to 13% for the rest of the UK.
Conclusion
With non-savings, non dividend income tax receipts now underpinning the Scottish budget, the Scottish Government needs to carefully consider earnings growth and income distribution when proposing its tax policy. As part of the budget process, the Parliament needs to vote through the tax policy before the budget can be passed. How this tax policy is structured can impact growth in overall Scottish income tax revenues and ultimately how much money is available for public spending.
Andrew Aiton, Data Visualisation Manager
Cover image: Pixabay