Fiscal framework outturn report: 2026

3. Income Tax

23. The Scottish Parliament has the power to set rates and bands for non-savings, non-dividend Income Tax. This includes earnings from employment, self-employment, pensions and property. The responsibility for defining the Income Tax base, which includes the setting or changing of Income Tax reliefs and exemptions, and the tax-free Personal Allowance, remains reserved to the UK. For any income people get from savings or dividends, the rates and bands are also set by the UK Government. Scottish Income Tax is therefore a partially devolved tax.

24. For Scottish Income Tax, outturn data is normally available around 16 months after the end of the financial year and a single reconciliation is applied to the following Budget, three years after the original Budget was set. For example, the reconciliation relating to Income Tax raised in the 2023-24 budget year was applied to the 2026-27 Budget.

25. Final outturn data for 2024-25 Income Tax was published by HMRC on 9 July 2026^[5]. This data has been used to calculate the reconciliations to the Scottish Government’s Block Grant, which will be applied to the 2027-28 Budget. Table 2 shows the difference between the final outturn for revenues and the BGA compared to the forecast at the time when the Scottish Budget was set. It also shows the change to the net effect on the Budget.

Table 2: Final Income Tax Reconciliation to 2027-28 Budget (£ million)

26. At the time of setting the 2024-25 Budget, the forecast for Income Tax revenue compared to the corresponding BGA was expected to have a positive net effect on Scotland’s finances, with revenues forecast to exceed BGAs by £1,412.1 million. The outturn data shows that revenues exceeded the BGA by £691.7 million. This translates into a £720.5 million negative reconciliation, which will correct for the forecast error at the 2024-25 Budget (see section 8 for a full breakdown of reconciliations for the 2027-28 Budget). This is a normal part of the Fiscal Framework and the application of reconciliations should not be interpreted as a reflection of the underlying performance of the Scottish or equivalent UK tax base.

27. Like last year’s reconciliation, there is significant volatility between the forecast-based Income Tax expenditure/BGA net position when the Budget was set and the final outturn-based net position. This will in part reflect that the net position is the difference between the forecasts of two large numbers (Scottish income tax and the BGA). Therefore, small changes in either forecast can result in large changes in the net position, particularly when the BGA deduction is increased as Scottish revenues decrease or vice-versa.

28. Figure 1 shows the fluctuations in the forecast income tax net position. The updated OBR forecasts revised the BGA substantially up in the Autumn Budget following Budget 2024-25, reflecting stronger earnings growth. It was only partially offset by an increase in the SFC forecast of Scottish income tax revenues at Budget 2025-26. The SFC subsequently revised their forecast down gradually at succeeding fiscal events. The improvement at the Scottish Budget 2026-27 was almost entirely driven by a large drop in the OBR BGA forecast, reflecting weaker outturn information. The lower final outturn was mostly due to a high revenue forecast, although a low BGA forecast also contributed to the deterioration.

29. The outturn data for Income Tax 2025-26 and 2026-27 should be available in summer 2027 and 2028 respectively, with reconciliations then being applied to the 2028-29 Budget and 2029-30 Budgets.

30. Estimates of future reconciliations for the financial years 2025-26 and 2026-27 are derived from the latest SFC and OBR forecasts. These reflect how the position could change since the initial budget setting forecast, and inform decisions about future resource borrowing and spending over Scottish Government’s multi-year funding envelope.