Who collects taxes in the UK?
Most taxes in the UK are controlled by the UK government, with tax rates set by Parliament, revenue collected by HMRC and the Treasury determining how this should be distributed across government. But there are some exceptions.
When the devolved administrations in Scotland, Wales and Northern Ireland were established in 1999, they were responsible for raising very little of the money they spent, relying instead on funding from the UK government.
Legislation passed over the past decade has changed this. The Scottish and Welsh Parliaments have taken full control of some smaller taxes, and have been granted power over aspects of the income tax system. These reforms were designed to improve the financial accountability of devolved administrations, and to incentivise them to choose policies that stimulate growth in their tax base.
Tax devolution has advanced more slowly in Northern Ireland and to local government within England.
Which taxes are devolved to Scotland?
Local taxes (council tax and business rates) have been devolved to Scotland since 1999. In principle, Scotland could completely redesign these taxes but this has not happened.
Landfill tax and stamp duty were fully devolved by the Scotland Act 2012. Land and buildings transaction tax has since replaced stamp duty in Scotland.
The power to set all income tax rates and bands above the personal allowance was devolved in the Scotland Act 2016. The Scottish parliament previously had limited powers to vary income tax rates, but these were never used. HMRC collects Scottish income tax revenue on behalf of the Scottish government. Income tax on savings and dividends is non-devolved.
Air passenger duty and the aggregates levy (a tax relating to rock, sand and gravel) are due to be devolved at a future date. In both cases devolution has been held up by legal issues relating to state aid.
Half of VAT receipts collected in Scotland are due to be ‘assigned’ to the Scottish government, but the implementation of this change has been delayed until the UK and Scottish governments can agree upon a method to estimate Scottish VAT receipts. Once implemented, the same VAT rates will continue to apply across the UK, but changes in Scottish VAT revenue will have a direct effect on the size of the Scottish government’s budget.
The Scottish Parliament can also create new taxes if they fund local authority spending. This power has been used to allow councils to charge a workplace parking levy. The Scottish Government has also suggested it may allow councils to add a levy on hotel bookings (a ‘tourist tax’).
Which taxes are devolved to Wales?
Local taxes (council tax and business rates) are devolved to Wales. The Welsh Government has introduced an additional higher council tax band (making the system more progressive than in England) and has introduced a premium for second-home owners.
Stamp duty land tax and landfill tax were devolved by the Wales Act 2014, which replicated the devolution of these taxes to Scotland.
Partial income tax powers are also devolved. UK income tax rates have been reduced by 10p in each band, on top of which the Welsh Parliament sets a ‘Welsh rate of income tax’ for each band. Unlike Scotland, Wales cannot alter income thresholds for existing bands or introduce new bands.
Which taxes are devolved to Northern Ireland?
Local taxes, which in Northern Ireland include domestic rates (in place of council tax) and business rates, are fully devolved.
Air passenger duty for long-haul flights has been devolved since 2012. Short-haul air passenger duty is not devolved.
Legislation was passed in 2015 to devolve corporation tax to Northern Ireland, so that tax rates could be reduced to the lower rates applying in the Republic of Ireland. However, implementation has been delayed indefinitely as the Northern Ireland Executive (NIE) and the Treasury have been unable to agree how this reform will impact the NIE block grant. 7 McDonnell F, Northern Ireland drops campaign for lower corporation tax rate, The Irish Times, 21 January 2020, www.irishtimes.com/business/economy/northern-ireland-drops-campaign-for-lower-corporation-tax-rate-1.4147171
Which taxes are devolved to English local authorities?
English local authorities set council tax rates and collect and retain the revenue, although tax rises above a centrally-set threshold (up to 5%) must be put to a local referendum.
Business rates revenue is collected locally by local authorities but tax rates are set nationally by the UK Government.
Under the business rates retention scheme, 50% of business rates revenue is retained locally with the other half redistributed across the country. A few places – including Greater Manchester, London and the West Midlands – have piloted the retention of up to 100% of revenue. The government has previously committed to 75% retention across England.
Police and Crime Commissioners, and some metro mayors have the authority to raise revenue from council tax through a ‘mayoral precept’ – an extra charge on top of the council tax rates set by local authorities. Mayors can also introduce a business rates supplement to fund infrastructure investment, with the agreement of the local business community.
How much tax revenue is devolved?
In the 2020/21 financial year, devolved tax revenue made up an estimated:
- 31% of tax revenue in Scotland
- 20% in Wales
- 11% in Northern Ireland
- 7-8% in England (including council tax and a share of business rates)
If all legislated tax devolution measures were implemented, this would increase to 39% in Scotland (including assigned VAT revenue) and 18% in Northern Ireland.
Why are some taxes devolved while others are not?
Some taxes are easier to devolve than others. The easiest to devolve are those relating to land or property, where it is easy to attribute revenue to a certain part of the UK, and difficult for taxpayers to move their assets to avoid paying taxes. This is one reason tax devolution in Scotland and Wales started with stamp duty land tax and landfill tax.
Of the larger taxes, devolution of income tax was judged the best candidate for devolution. This was partly because of its high visibility, which makes it a good tax for enhancing devolved accountability. The devolution of other major taxes was ruled out for practical, legal or economic reasons, including:
- It would be complicated to break up the UK-wide system for national insurance.
- Devolving corporation tax to Scotland or Wales could create unwelcome tax competition between different parts of the UK (although, as noted, it was proposed in Northern Ireland specifically to allow the north to compete with the Republic of Ireland).
- EU laws meant that the same VAT rates had to apply across the UK. In principle, VAT could be a candidate for devolution now the UK has left the EU, but this would run counter to the UK government’s commitment to preserving the UK internal market and avoiding new barriers for business.
How do tax revenues vary across the UK?
Since 1999, tax revenue in Wales and Northern Ireland has been significantly lower than in England, while that of Scotland has been more volatile, principally due to fluctuating offshore oil and gas revenue.
There is also significant variation across the UK for individual taxes. Revenue varies more for income tax, which has been partially devolved, than for VAT and national insurance, which have not. The greater proportion of higher rate taxpayers in England is one reason why this gap has widened in recent years. Corporation tax receipts have also shown huge volatility in Scotland due to rising and falling revenue from offshore oil and gas.
Of the smaller taxes, stamp duty (now replaced by devolved equivalents in Scotland and Wales) is among the most volatile. Here again England greatly outperforms the rest of the UK.
On the other hand, English tax receipts per person are lower than the other nations for taxes on fuel, alcohol and tobacco. Within England, there is also a huge variation in council tax and business rate revenue by local authority. The IFS estimated, 8 Amin-Smith N, Phillips D, Simpson P, Spending needs, tax revenue capacity and the business rates retention scheme, Institute for Fiscal Studies, February 2018, www.ifs.org.uk/uploads/R141.pdf for example, that local tax raising capacity was 14 times higher in Westminster than in Lewisham in 2015/16.
Tax revenue in each nation was severely impacted by the pandemic, including both devolved and reserved taxes. Tax revenue fell by 13% for VAT, 24% for stamp duty, and 41% for business rates in the 2020-21 financial year compared to 2019-20. However, revenue from income tax and corporation tax remained steady.
How have devolved administrations used their tax powers?
The devolved administrations have all used their new tax powers to diverge from tax policies set in Westminster.
In both Scotland and Wales, the threshold for paying property transaction tax (stamp duty) is now lower than in England – at £145,000 in Scotland and £225,000 in Wales compared to £250,000 in England. This means lower value property purchases incur more tax in Scotland and Wales compared to England. Scotland and Wales also charge higher property transaction taxes on expensive properties, levy higher taxes on second home purchases, and have not replicated the significant discount for first-time buyers that is available in England.
In Scotland, income tax rates have also diverged from the rest of the UK. The Scottish government has introduced two new tax bands for lower earners, and increased tax rates for higher earners by 1p per pound. The overall effect is that those earning less than around £27,000 pay less tax in Scotland, with those earning above that amount paying more tax in Scotland. Since partial income tax powers were devolved to Wales in 2019, the Welsh government has chosen not to diverge from the policy set in Westminster.
The Northern Ireland executive has used its powers over air passenger duty to abolish the duty for direct long-haul flights departing from Northern Ireland.
Tax devolution is accounted for by adjustments to the block grants that the Treasury provides to fund devolved public services. Roughly speaking, when devolved tax revenue rises faster than equivalent revenue elsewhere in the UK, the devolved block grant is increased, and vice versa.
How devolved are other countries’ tax systems?
The UK is an outlier by international standards. In 2014, every other G7 nation collected more taxes at either a local or regional level according to estimates by the Organisation for Economic Co-operation and Development.
- McDonnell F, Northern Ireland drops campaign for lower corporation tax rate, The Irish Times, 21 January 2020, www.irishtimes.com/business/economy/northern-ireland-drops-campaign-for-lower-corporation-tax-rate-1.4147171
- Amin-Smith N, Phillips D, Simpson P, Spending needs, tax revenue capacity and the business rates retention scheme, Institute for Fiscal Studies, February 2018, www.ifs.org.uk/uploads/R141.pdf