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A joint statement from the Scottish Government and HM Treasury setting out the income tax reconciliation process and detailing the 2022-23 income tax reconciliation.

This statement, jointly agreed by HM Treasury and the Scottish Government, shows both governments’ continued ambition to ensure full transparency in, and to improve wider understanding of, the Scottish Government’s Fiscal Framework and specifically the reconciliation process. This is in line with recommendations by stakeholders, including those given by the Scottish Parliament’s previous Finance and Constitution Committee. Please see the Committee’s Pre-Budget Scrutiny Report 2020-21 for further details.

Reconciliation for 2022 to 2023 income tax

On 11th July 2024, HMRC published Income Tax outturn statistics for the tax year 2022-23.

The publication provides the figures for both Scottish Income Tax revenues, and the equivalent Income Tax revenues for the rest of UK that are used to calculate the Scottish Government’s Income Tax Block Grant Adjustment, as set out in the Fiscal Framework agreed between the Scottish and UK Government. This allows the Income Tax reconciliation applying to the 2025-26 Scottish Government budget to be calculated. The reconciliation is a normal part of operating the Fiscal Framework and ensures the Scottish Government’s funding is based on actual Income Tax revenues, rather than forecasts.

Calculating the reconciliation requires comparing the forecast and outturn figures for Scottish Income Tax revenues and for the Block Grant Adjustment for the year 2022-23. The difference between the forecasts and the outturn is applied to the Scottish Government’s Budget and funding in 2025-26. Further background is set out below, after the calculations.

Due to the revision of population estimates following the Scottish Census in 2022, this reconciliation also takes account of the updated assessment of the population in Scotland from 2016 to the present, as published on 9 July 2024 by the National Records of Scotland. Further detail on how the revision of population estimates has affected the reconciliation is set out in the background section.

The two reconciliation components will have the following effects, as summarised in the table below:

• Block Grant Adjustment: The outturn is higher than was forecast at the time of the 2022-23 Scottish Budget so this will increase the Block Grant Adjustment (and by implication reduce the Scottish Government’s block grant) by £1,050m in 2025-26
• Scottish Income Tax: The outturn is higher than was forecast at the time of the 2022-23 Scottish Budget so this will increase Scottish Government self-funding by £1,498m in 2025-26

The net reconciliation effect is a £449m increase in the Scottish Government’s funding for 2025-26.

Reconciliation for 2022-23 income tax which will impact the 2025-26 Budget

Note – numbers may not sum due to rounding.

Revisions to previous outturn years

In 2024, an inconsistency with National PAYE System (NPS) data was discovered by HMRC. This issue arose where individuals had submitted unsolicited self-assessment (SA) returns and had therefore been reconciled in both the NPS (PAYE) system and in the SA system, leading to double-counting of their PAYE liabilities. This caused figures for Scottish, Welsh and rest of UK non-savings non-dividend (NSND) Income Tax data to be overstated by roughly 1% in each historic year. No taxpayers have paid the incorrect tax as a result of this issue. This inconsistency has implications for Scottish Income Tax outturn and the associated Block Grant Adjustments from 2016-17 onwards resulting in a relatively small deterioration in the net position in each year. The process of producing the outturn figures has been corrected for the 2022-23 outturn. The figures from the previous outturn years (2016-17 to 2021-22) have been corrected in HMRC’s 2022-23 statistical release.

Use of the corrected outturn statistics together with the revised population figures from 2016-17 to 2021-22 would have increased the negative reconciliations applied to the Scottish Budget by £29m overall. Both governments are working through the funding implications of this. Further details will be provided in due course.

Background

The Scotland Act 2016 devolved additional tax powers to the Scottish Government. In April 2017, the Scottish Government gained the power to set the rates and bands for non-savings and non-dividends (NSND) Income Tax in Scotland. HMRC is responsible for the collection of Scottish Income Tax.

The Scottish Government is partly funded by the UK Government block grant, and partly self-funded through raising revenue from devolved taxes and borrowing.

The block grant is determined by the longstanding Barnett formula.

The block grant is now adjusted to reflect the impact of the transfer of greater fiscal powers to the Scottish Government. These Block Grant Adjustments are deductions for tax powers and additions for social security benefits. Alongside this, the Scottish Government retains all revenues from devolved taxes, has a Scotland Reserve and has capital and resource borrowing powers with agreed limits.

The Scottish Government has the power to borrow up to £600 million for resource annually within a statutory overall limit for resource borrowing of £1.75 billion, with both limits in 2023-24 prices (meaning these limits will be uprated annually from 2024-25 using the Office for Budget Responsibility's (OBR) GDP deflator forecast at the time of the Scottish Government draft budget). Resource borrowing can only be used for the following reasons:

• for in-year cash management
• for forecast error in relation to devolved and assigned taxes and demand-led welfare expenditure arising from forecasts of Scottish receipts/expenditure and corresponding UK forecasts for the Block Grant Adjustments

Initially, the Scottish Government’s Income Tax revenues are forecast by the Scottish Fiscal Commission (SFC) and the Income Tax Block Grant Adjustment is based on Office for Budget Responsibility (OBR) Income Tax forecasts for the rest of the UK. Once the forecast revenue is determined and the corresponding Block Grant Adjustment is made, there are no changes in the Scottish Government’s funding until outturn data are available.

As set out in the Scottish Government’s Fiscal Framework, Income Tax outturn published in HMRC’s Annual Report and Accounts, which is normally published around 16 months after the end of the financial year, will then be used to determine the Scottish Government’s funding for the following financial year through a reconciliation process.

Following the outputs of the Census in 2022, HM Treasury and the Scottish Government have also taken account of revisions to Scottish population estimates for the 2022-23 Income Tax reconciliation. The Scottish Block Grant Adjustment is indexed according to the  percentage change in Income Tax revenues in the rest of the UK, weighted by the relative population growth between Scotland and the rest of the UK. In light of the Census in 2022, the Office for National Statistics and the National Records of Scotland have published rebased historical estimates of the population in Scotland, between 2011-21. HM Treasury and the Scottish Government have consequently updated the population estimates used to calculate the Block Grant Adjustments to ensure that they reflect the most accurate understanding of relative population growth rates between Scotland and the rest of the UK.

Following the arrangements agreed in the Scottish Government’s Fiscal Framework agreement, a reconciliation for 2022-23 Scottish Income Tax will be applied to the 2025-26 Scottish Budget, which factors in the 2022-23 Income Tax outturn data and the updated population estimates. The reconciliation covers both Scottish Income Tax revenues and the Block Grant Adjustment.