CIOT Scottish response to UK Budget

Ellen Milner, CIOT Director of Public Policy, said:

“Today is only part of the tax puzzle for Scotland, because we need to wait for the Scottish Government’s tax plans in January.

“But there are some decisions from today that will have practical implications for Scotland."

New rates of income tax on property income

“This specific change 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”¹.

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.”

Other measures of interest to Scotland include: 

Extending the personal allowance freeze:

“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/increase:

“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."

On the proposal for a council tax charge on the 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”.

Notes

1. Section 80(C) (2b) of the Scotland Act 1998 states that “a Scottish rate resolution [the vote to set Scottish income tax rates] may not provide for different rates to apply in relation to different types of income”.

However, paragraph 4.114 of today’s Budget document has confirmed that the Finance Bill 2026-27 will provide the devolved governments “with the ability to set property income rates in line with their current income tax powers in their fiscal frameworks. This will be legislated for in Finance Bill 2025-26 and take effect from 6 April 2027.”