Scottish Budget: Key decisions and tax strategy

This week, the Scottish government set out their budget for 2026/27. While it contained some welcome measures, there was very little in the way of longer-term focus and addressing the fiscal challenges that lie ahead for Scotland. We look at the main tax announcements, and how these align with the Scottish government’s priorities and tax strategy.

Scottish income tax is the main tax lever that the Scottish government can use to balance the budget. It funds approximately 32% of the overall 2025/26 Scottish budget and is therefore critical to the wider concerns around economic strategy and stability of public finances.  

Scottish Income Tax  

No changes were made to the number of income tax bands or to the income tax rates, but the Finance Secretary did announce an increase to the basic and intermediate rate thresholds. The amount at which these bands start will go up by 7.4% from 2026/27, is shown below. 

		2025/26	2026/27
Band	Rate	Taxable income
Starter	19%	£12,571 to £15,397	£12,571 - £16,537
Basic	20%	£15,398 to £27,491	£16,538 - £29,526
Intermediate	21%	£27,492 - £43,662	£29,527 - £43,662
Higher	42%	£43,663 - £75,000	£43,663 - £75,000
Advanced	45%	£75,001 - £125,140	£75,001 - £125,140
Top	48%	Over £125,140	Over £125,140

This protects those on lower incomes from inflationary rises which may have pulled them into the tax system or moved them up into the next tax band. It also maintains the proportion of Scottish taxpayers who pay less tax than the rest of the UK. Under these measures, around 55% of Scottish taxpayers will pay less tax than those in the rest of the UK in 2026/27. However, that difference in tax is very small (around £40 per year for someone earning £25,000 annually) and therefore the benefit to those lower earners is not as meaningful as it might at first appear.  

The remaining bands were frozen until 2028/29, which will have an impact for Scottish taxpayers in terms of ‘fiscal drag’. This happens as people see an increase in their salary, due to inflationary adjustments, and consequently they will be pulled into higher tax bands and pay more tax. Since the cost of goods and services will also rise with inflation, there won’t be a noticeable difference in spending power. This will generate more tax revenues for the Scottish government but is unlikely to encourage growth and productivity. The design of the Scottish income tax system, with six bands compared to three in the rest of the UK, means that fiscal drag is more pronounced. So, if you live and work in Scotland, you are more likely to find yourself moving up the tax bands over time than elsewhere in the UK.  

The measures around income tax therefore lack clarity on the longer-term strategy for economic growth and how the revenues raised will support the government’s priorities around child poverty, enhancing public services and tackling climate change. As such an important fiscal revenue raising tool, the Scottish income tax strategy needs to be aligned to those long-term goals and importantly, to the future challenges that may be faced.  

The Scottish government has openly addressed some of those challenges in their tax Strategy, which includes the difficulties of meeting the healthcare needs of an aging population, while the number of working age people who can raise tax revenues decreases at the same time. With an income tax strategy that means 22% of taxpayers in Scotland are forecast to pay 69% of the overall income tax, long term consideration of how our tax base may change and how it can best support our future needs is critical.  

Council tax 

The budget also included the introduction of a ‘mansion tax’, styled similarly to the one introduced by the UK government in the 2025 Autumn budget. There are some important differences, however, as the UK mansion tax is a surcharge on high value homes and although it will be collected alongside council tax, the money will ultimately go to the Treasury.  

From 1 April 2028, Scotland will have two additional council tax bands, to be based on updated valuations: Band I for properties valued between £1 million and £2 million, and Band J for properties valued above £2 million. This will only affect around 1% of properties in Scotland (around 11,000 homes) and so won’t generate significant revenues. The expectation is that this will operate within the current council tax system, meaning money goes to local authorities.  

This measure was unexpected given there is a current open consultation on council tax reform due to close on 30 January 2026. To announce changes to the council tax system before hearing feedback on that wider consultation seems to lack proper transparency and damages the government’s engagement process with wider stakeholders.  

Land and Building Transaction Tax 

There was no change to the existing rates and thresholds for Land and Building Transaction Tax (LBTT). While this provides some certainty, it also means that LBTT will be subject to fiscal drag along with income tax. As house prices increase over time due to inflation, more properties will be pulled into higher bands and therefore subject to higher tax.  

A review of LBTT is currently underway and so we may expect to see some further announcements on this later in the year. LBTT makes up a small percentage of the Scottish budget, accounting for only 1.6% in 2025/26. However, it influences behaviours around property ownership and moving, so should be considered carefully regarding the wider economic strategy.  

Non-domestic (business) rates 

Some support on non-domestic rates was introduced in the budget and will provide relief to some businesses facing rising costs. The basic, intermediate and higher property rates in 2026-27 will be decreased to 48.1p, 53.5p and 54.8p respectively. This is expected to be tax neutral in terms of the wider revaluation cycle.  

Relief to properties in the retail, hospitality and leisure sectors which are liable for the basic or intermediate property rate will be fixed at 15 per cent and available for three years, capped at £110,000, per business, per year.  

There will also be 100 per cent relief to retail, hospitality and leisure premises located on islands, and in the remote areas of Cape Wrath, Knoydart and Scoraig for three years, capped at £110,000 per business per year.    

The Small Business Bonus Scheme relief will also be maintained at the existing rates and thresholds for three years.  

These measures are positive and show that the Scottish government is responding to the concerns of Scottish businesses within the budget decisions. Although this was the Scottish government playing catch up with the rest of the UK who have had lower rates for a few years. Given the budget was light on other business initiatives, it’s unlikely that Scottish businesses will see much in terms of tangible support otherwise. There were undoubtedly some targeted initiatives at industry sectors and entrepreneurs announced, but longer term, holistic vision was lacking.   

Air Departure Tax 

Air Departure Tax (ADT) will be introduced from 1 April 2027. From that date, the existing UK-wide Air Passenger Duty (APD) will cease to apply to Scottish passengers. This has been long awaited but was stalled due to difficulties around exemptions for the Highlands and Islands. A consultation on a new Highlands and Islands exemption will launch at the end of this month to address this and the Scottish government will engage with local stakeholders and the aviation industry on this.  

Rates and bands for ADT in 2027-28 will match those for Air Passenger Duty in 2027-28, which will provide certainty for operators and passengers. The introduction of a Private Jet Supplement was also announced, expected to apply from 2028/29.  

This helps to achieve some of the aims around devolved taxes, as the Scottish government wanted to complete the introduction of ADT before the end of their current term.  

Let us know what you think 

We'd love to hear your views on how the Budget will impact the economy and what you'd like to see from the new Scottish government after the elections in May. Share your thoughts through our survey, it'll take less than five minutes, and we'll use your feedback to guide how we approach our discussions with politicians and decision makers. 
 
The survey closes on 12 noon 20 January. 

We are also running a webinar on 20 January at 11am to talk through some of these changes and the wider devolved tax landscape. Please register here.

Contact the ICAS Tax team