Scottish Budget 2025-26

There were no big giveaways in the Scottish Budget, presented on 4 December 2024 by Finance Secretary Shona Robison. This wasn’t a surprise given the Scottish Government had little financial headroom to manoeuvre.

Scotland’s large public sector base means last month’s UK Budget announcement of a 1.2% increase in Employer’s National Insurance, effective from 6 April 2025, will cost the Scottish Government an estimated £500 million. This figure accounts for the additional National Insurance Contributions (NIC) on staff directly employed in the public sector, rising to as much as £750 million when factoring in indirect employees, such as those in childcare, colleges, and social care. For context there is nearly 600,000 people working in the public sector — equating to 22% of Scotland’s workforce compared to 17% across the UK.

Key takeaways announced in the Budget were:

Scottish Rate of Income Tax and thresholds

Two-child benefit cap

Land and Buildings Transaction Tax

Scottish Landfill Tax

Non-Domestic rates

Council Tax

Scottish Rate of Income Tax and thresholds

• No change to Scottish income tax rates, so the top rate of Scottish Income Tax remains at 48% on income in excess of £125,140. It was announced that income tax rates would remain frozen for the rest of the Parliament and the number of tax bands would also be frozen.  This is welcome news, given the already complex number of bands and tax rates within the Scottish Rate of Income Tax. 
• Disappointingly though the top rate of tax within Scotland remains 3% higher than the rest of the UK and there is not yet sufficient data to determine if these higher income tax rates are creating behavioural changes amongst the Scottish tax base.  Certainly Scottish income tax revenues are predicted to grow at a slower rate to that of the rest of the UK, leading to the concern that as costs of public services increase the tax base is not keeping pace which in turn means less funding to go around.
• Remember for Scottish Resident Taxpayers the Scottish Rate of Income Tax applies to income other than savings and dividend income which are taxed at Rest of UK rates.
• There was, however, an announcement to increase the basic rate and intermediate rate thresholds by 3.5%, essentially twice the rate of inflation, to £15,397 and £27,491 respectively.  All other thresholds, ie. Higher, Advanced and Top rate thresholds will be maintained at £43,662, £75,000 and £125,140 respectively. 
• In terms of the monetary impact of the threshold rises for those earning at the basic rate and intermediate rate - at most this is saving these Scottish taxpayers approximately £15 per annum.
• The continued freeze on the higher rate threshold will bring more individuals into the higher rate of tax (42%) and is essentially a stealth tax as the thresholds are not rising in line with inflation and/or wage rises.
• In addition, versus the Rest of the UK rates, the higher rate of 42% kicks in at a much lower level being income over £43,663 versus a 40% rate that kicks in within the rest of the UK on income over £50,271.
• The marginal tax rate (including employee’s national insurance) for those earning between £43,663 and £50,271 in Scotland from 6 April 2025 is 50% versus 28% in the rest of the UK. This can influence and impact on recruitment North of the border given the significant tax differential at these levels.

New income tax levels in Scotland 2025-26

*reduced by £1 for every £2 earned over £100,000

Two-child benefit cap – to be scrapped

The Scottish Government announced in their Budget that the restriction to being able to claim child tax credit and/or universal credit for a third child will effectively be scrapped. The mechanics for this are to be determined but the Scottish Government is looking at providing those families affected by the cap with a payment making up the difference. The Scottish Government is hopeful to bring this in come 2026.

Land and Buildings Transaction Tax (LBTT)

The Additional Dwelling Supplement (ADS) rate was raised by 33% from 6% to 8% effective from 5 December 2024. The ADS is an additional tax charge generally suffered when individuals acquire a second residential property, unless certain conditions are met (for example a second property was acquired to replace an existing home). This move has effectively doubled the ADS rate, in a period of less than 2 years, as the ADS rate moved from 4% to 6% on 16 December 2022.

The equivalent Stamp Duty Land Tax (SDLT) surcharge for property investors in England and Northern Ireland had, on 31 October 2024, been increased from 3% to 5%. Therefore, it was hoped that this would create less of a disparity for investors looking between Scotland and England and potentially attract investment to Scotland. Unfortunately, by increasing the ADS rate to 8% this ensures that the disparity on second home purchases remains at 3% where investors are deciding to buy residential properties on either side of the border.

An average property of £200,000 will cost £4,000 more (i.e. ADS of £16,000 v £12,000) to acquire on 5 December, versus 4 December, a not insignificant additional cost to be added to other additional financing costs.

A saving grace will be that transitional provisions will apply to transactions where missives were signed on or before 4 December 2024. In these cases, the previous rate of 6% will continue to apply.

In terms of additional announcements:

• Residential and non-residential LBTT rates and bands will be maintained at their current levels until at least 2026. With continued increases in house prices, this will effectively increase the amount of LBTT on the average home purchase.
• In Spring 2025, there will be a review into the LBTT legislation to ensure that the “the policy intent is still met”. The detail is light on what this may relate to but, the press release has suggested that there will, amongst other areas, be a “further review to explore the impact of the ADS where exceptional circumstances or events occur.”
• In early 2025, consultations will be published to:
  • Provide relief from LBTT on the exchange of units within Co-ownership Authorised Contractual Schemes (CoACS) investing in Scottish property; and
  • Introducing a LBTT relief for the seeding of properties from existing unauthorised investment vehicles into Property Authorised Investment Funds (PAIFs) and CoACS

Scottish Landfill Tax (SLfT)

From 1 April 2025, the Landfill Tax will increase as follows:

• the standard rate of SLfT to £126.15 per tonne; and
• the lower rate of SLfT to £4.05 per tonne.

However, it is expected that revenues from this tax will decrease due to a ban on biodegradable municipal waste being sent to landfill which comes into force on 31 December 2025.

Non-Domestic Rates (NDR)

The Basic Property Rate has been frozen, but the Intermediate and Higher Property Rates will increase with inflation. However, the Scottish Government is continuing to apply a number of reliefs, including the Small Business Bonus Scheme and the Business Growth Accelerator reliefs.

There will also be a 40% relief available for the hospitality sector (up to a maximum of £110,000 per business). Unlike the reliefs announced by the UK Government for England that extended to hospitality, retail and liesure, the Scottish Government's measure is much more limited as it applies to hospitality only and also "small" hospitality businesses i.e. those with rateable value of less than £51,000. 

In addition there will be 100% relief for hospitality businesses on the Islands and three prescribed remote areas (up to a maximum of £110,000 per business).

The rates and thresholds for NDR for the 2025-26 tax year are shown below.

Non-Domestic Rates Thresholds 2025-26 are shown below:

Council Tax

The Scottish Budget has not put a restriction on the amount by which local authorities can increase Council Tax rates. In last year’s Budget there was a freeze on Council Tax rates but given the increased financial squeeze on local authorities, it is not surprising that the Scottish Government have given the green light to local authorities to determine what level of Council Tax rate to set independently.  This could see the potential for significant rate rises in certain local authorities.

New Taxes

The Scottish Government has announced that it plans to introduce new taxes in the coming years:

• Building Safety Levy – This is intended to be the equivalent of a tax to be introduced in England to help fund the Scottish Government’s Cladding Remediation Programme.
• Cruise Ship Levy – A public consultation will launch on the implications of introducing a Cruise Ship Levy.
• Carbon Land Tax – The Scottish Government intends to work with the Scottish Land Commission to consult with stakeholders on possible future taxation in this area.