Following on from Rachel Reeves, Shona Robison the Finance and Local Government minister yesterday set out her tax raising and expenditure plans for the financial year 2025/26.
With devolved responsibility over only a few taxes it does inevitably mean that the tax impact of Scottish Government ’Budgets’ is more limited albeit it hasn’t prevented significant income tax rises for Scottish residents previously.
This year amidst a background of significantly increased funding yesterday’s announcements concentrated more on expenditure than raising finances. There was a welcome commitment to no more income tax increases or rate bands for the next two years.
However, as seems all too common for any Government these days, fiscal drag will apply through the failure to raise the tax thresholds at the points where Scottish taxpayers pay higher, advanced or additional tax rates. This means we will see more Scottish taxpayers dragged into the net of paying these higher tax rates, with many Scottish taxpayers paying significantly more income tax than their counterparts in the rest of the UK.
There was some welcome relief on the non-domestic rates (business rates) front for businesses occupying premises with rateable values of £51,000 or less and for smaller businesses operating in the hospitality sector.
An increase of 1/3 on the rate of Additional Dwelling Supplement to 8% for any residential property costing more than £40,000 that is not a main residence is a further deterrent for investment in the property rental market.
More details on these are set out below.
In setting revised spending targets for Scotland, Rachel Reeves Budget in October took account of extra funding under the long established Barnett formula and for 2025/26 it means Scotland will see receive an additional £3.4 billion.
Reeves’ main revenue raisers were a combination of an increased employer’s rate of national insurance contributions (NICs) and a 45% reduction in the secondary threshold at which these start to be paid. As NICs are not a devolved tax, which is one reason why the Scottish Government has focused on income tax as its source of increased revenue.
However, the scope for further rises in income tax may be reaching the end of the road. In mid-November a paper from the Institute for Fiscal Studies suggested that, “Overall, evidence from Scotland, the rest of the UK and overseas suggests that behavioural responses to Scotland’s higher taxes will have offset a significant part of the revenue that would otherwise have been raised – and indeed potentially more than offset the revenues for the top rate of tax.”
At the end of November the Fraser of Allander Institute calculated that central and local government pay pressures, and the recently announced reinstatement of winter heating payments for 2025, meant that most of the extra 2025/26 funding generated by the UK’s Budget was already committed and depending on what happens with public sector pay rises in the year ahead we could very well see the Scottish Government needing to take emergency action again to rectify the fiscal position.
Scotland’s Tax Strategy: Building on our Tax Principles’ was published as part of the Budget documentation, setting out medium-term goals for how the tax system should develop. Notably, the Strategy states “it is our intention not to introduce any new bands or increase the rates of Scottish Income Tax”. It also says that the Scottish higher, advanced and top rate thresholds will be maintained at current levels in nominal terms for the remainder of the Parliament.
Income tax
The structure of Scottish income tax will be little changed in 2025/26:
Scottish taxpayers – non-dividend, non-savings income |
2025/26 |
2024/25 |
||
Tax Rate |
|
Tax Rate |
|
|
Starter rate on taxable income up to |
19% |
£2,827 |
19% |
£2,306 |
Basic rate on next slice up to |
20% |
£14,921 |
20% |
£13,991 |
Intermediate rate on next slice up to |
21% |
£31,092 |
21% |
£31,092 |
Higher rate on next slice up to |
42% |
£62,430 |
42% |
£62,430 |
Advanced rate on next slice up to |
45% |
£125,140 |
45% |
£125,140 |
Top rate on income over |
48% |
£125,140 |
48% |
£125,140 |
Land and buildings transaction tax (LBTT)
The Additional Dwelling Supplement (ADS) will increase from 6% to 8% with effect from 5 December 2024, matching the two percentage point increase announced in the UK Budget. The First Time Buyers relief will be maintained with a nil rate band of £175,000.
Land and buildings transaction tax (LBTT) on slices of value from 5 December 2024 |
|||
Residential property |
% |
Commercial property |
% |
Up to £145,000 |
0 |
Up to £150,000 |
0 |
£145,001 – £250,000 |
2 |
£150,001 – £250,000 |
1 |
£250,001 – £325,000 |
5 |
Over £250,000 |
5 |
£325,001 – £750,000 |
10 |
|
|
Over £750,000 |
12 |
|
|
First-time buyers: 0% on first £175,000 Additional residential and all corporate residential properties £40,000 or more: add 8% to rates |
A review of LBTT will be undertaken, starting in Spring 2025. Around the same time, the government will publish a consultation on draft legislation to provide relief from LBTT on the exchange of units within Co-ownership Authorised Contractual Schemes (CoACS) investing in Scottish property. The aim will be to provide for consistency with existing arrangements in the rest of the UK.
Scottish non-domestic rates (NDR)-
The next revaluation will take effect from 1 April 2026, based on property values as at
1 April 2025. For 2025/26 the poundage rate will be frozen again for businesses subject to the basic property rate (those with rateable values of up to and including £51,000) at 49.8p, while the poundage for the intermediate and higher property rates will rise in line with inflation to 55.4p and 56.8p respectively.
100% relief will continue to apply in 2025/26 for hospitality businesses located on islands as defined by the Islands (Scotland) Act 2018 and in three prescribed remote areas (capped at £110,000 per business). In the remainder of Scotland, 40% relief will be available to properties in the hospitality sector (including Grassroots Music Venues with a capacity of up to 1,500) which are liable for the basic property rate (those with a rateable value up to and including £51,000), capped at £110,000 per business.
Other NDR measures included:
Scottish landfill tax
The standard rate of Scottish landfill tax will increase from £103.70 a tonne to £126.15 a tonne and the lower rate from £3.30 a tonne to £4.05 a tonne from 1 April 2025, ahead of the legislative ban on the landfilling of all biodegradable municipal waste coming into force on 31 December 2025.