Analysis – Small tax reductions, but fiscal drag remains a problem

Garry Tetley, Head of Tax at Deloitte in Scotland, said: “There were no increases in Scottish income tax rates or new tax bands this year. Adjustments in the lower rate bands will result in small tax savings of up to £31.75 for taxpayers at all levels, but wage inflation will push many taxpayers into higher rate bands.

While the starter rate band and basic rate bands are both increasing, the higher rate threshold remains at £43,662 for a sixth year running. This is still significantly lower than the UK higher rate threshold of £50,270 which has been frozen until 2030/31. Employees earning between these thresholds also pay 8% national insurance, which results in a combined marginal tax rate of 50% in this income bracket for those living in Scotland. The advanced rate (45%) threshold and the top rate (48%) threshold are also frozen at £75,000 and £125,140, respectively.

Lower earners in Scotland continue to pay slightly less tax than those in the rest of the UK (the maximum saving is £39.67); the breakeven point for 2026/27 is £33,493. Individuals earning £15,397 or less will be unaffected by the changes, as all of their taxable income continues to be taxed at 19%, but they will still be paying fractionally less than those in the rest of the UK.

The Scottish Government’s devolved powers for personal taxes are limited to setting the bands and rates of income tax for non-savings non-dividend income, such as salaries, profits and pensions.

Income tax on savings and dividend income, capital gains tax and national insurance are all set by the Westminster government. Most of these rates and thresholds are the same in 2025/26 and 2026/27, with the exception of dividend rates for basic and higher rate taxpayers, which are increasing by two percentage points to 10.75% and 35.75%, respectively. The tax rates for savings income will be increasing by two percentage points across the UK from 6 April 2027. The Scottish Government will have the discretion to charge special rates on property income from the same date, but no announcements were made on this today.

The commitment (for the rest of the Parliament) not to introduce any new bands or increase the rates of Scottish income tax and uprate the starter and basic rate bands by at least inflation provides stability. However, the continued divergence from the rest of the UK means that those on the highest salaries will continue to face higher tax bills in Scotland.

The Scottish Government also announced today that they will be introducing two new council tax bands from April 2028 for properties worth more than £1 million. Council tax is a devolved matter, so this will run in parallel with England’s new High Value Council Tax Surcharge for properties worth more than £2 million, which was announced in the Autumn Budget on 26 November 2025.”