The Budget statement is only part of the tax puzzle for Scotland, because of the devolution of some taxation to the Scottish Government and we need to await further decisions in its own Budget on 13 January.
But there are some decisions from the Chancellor’s announcement that will have practical implications for Scotland.
Freezing tax thresholds
The personal allowance freeze will apply in Scotland, but the other income tax threshold freezes announced today will not, because Holyrood sets these for Scotland and they could change in January.
Freezing the level people start paying tax is likely to bring more low paid workers and pensioners into income tax as earnings rise and the threshold stays put.
For example, we expect the full new state pension to exceed the personal allowance in 2027/28, while from next April, workers earning the minimum wage will only be able to work around 20 hours a week before they start paying income tax on their earnings.
But the freezing of the personal allowance does mean that there is more money for the Scottish Government to tax.
Capping National Insurance relief on salary sacrifice contributions
Limiting NI savings to the first £2,000 of pension contributions from salary sacrifice from April 2029 will make it more expensive for workers and businesses to contribute towards retirement and could reduce take home pay and increase payroll costs.
Some employers may choose to hold down their payroll costs to counter the extra national insurance costs. Employees may conclude that the extra costs are a disincentive to save for the future.
And for businesses in Scotland already reportedly dealing with the extra costs associated with Scottish income tax, it is a further reminder of the need for better information on the real-life impacts on Scottish taxpayers of tax policy choices taken on either side of the border.
Dividend tax changes
Investors face a 2% increase in the basic and higher rate of dividend tax from April 2026.
Currently, an investor can earn up to £500 in dividends outside of an ISA or pension in a tax year before they start paying tax on that income. At that point, basic rate taxpayers are charged 8.75%, higher rate taxpayers pay 33.75% and additional rate taxpayers pay 39.35%.
For example, a basic rate taxpayer earning 4% yield on a £100,000 portfolio would receive £4,000 in dividends. The first £500 is free of tax, and they pay 8.75% on the remaining £3,500, equating to £306.25.
The dividend tax rates will rise next April to 10.75% at the basic rate and 35.75% at the higher rate, and no change to the additional rate. In the same example of a basic rate taxpayer earning 4% yield on a £100,000 portfolio, their tax bill would increase to £376.25.”
Dividend tax is set on a UK-wide basis, so these changes will apply in Scotland.
Increasing the tax rate could make it less attractive for some small business owners to incorporate a business to avoid higher rates of Scottish income tax.
New rates of income tax on savings income
This will apply to Scottish taxpayers, as they are subject to UK rates and bands of income tax on their savings income.
New rates of income tax on property income
An additional 2% tax on property income at the basic, higher and additional rates for individuals will not apply in Scotland, where property income is currently taxed at Scottish rates of income tax.
The Chancellor has effectively created a new income tax regime for property income, and while this is not something the Scottish Government can do at the moment, the Budget fine print suggests it will get the power to do so from April 2027.
Possible council tax charge on owners of high value properties:
While these changes won’t apply in Scotland, the Scottish Government is currently consulting on a plan of its own to reform council tax in Scotland.
Today’s announcement may give them pause for thought, but the fact remains that council tax in Scotland remains based on property values that are outdated, inaccurate and, in the case of homes built after 1991, hypothetical.
Ellen Milner is director of public policy at the Chartererd Institute of Taxaation
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