How to pay for a Minimum Income Guarantee

The available revenue-raising options

In this section, we capture the full range of revenue-raising options that could be open to the Scottish Government if it were to implement the Expert Group’s recommendations on a MIG. The chapter is organised by seven tax groupings that formed part of the Mirrlees Review.^[53] The tax groupings we explore are:

• income tax;
• National Insurance contributions;
• council tax;
• business taxes;
• wealth and capital taxes;
• VAT; and
• other indirect taxes.

For each tax grouping, we provide background context before outlining the range of revenue-raising options across different stages of devolved powers.

To locate the various revenue-raising options that are open, we have primarily consulted four major assessments of Scotland’s tax system:

• IFS analysis of taxation under independence completed in 2013;^[54]
• Reform Scotland’s 2022 assessment of why Scotland needs ‘new, more and better taxes’ conducted by former civil servant (in both Scotland and New Zealand) Heather McCauley;^[55]
• IPPR Scotland’s 2023 report on the need for a fairer and better tax system to fund action on poverty and inequality (supported by 52 Scottish organisations);^[56] and
• A 2023 economic analysis of short-term and long-term tax options for Scotland completed by Landman Economics commissioned by the STUC.^[57]

Income tax

Background

Since 2016, the Scottish Government has taken on more devolved powers over income tax. The Scotland Act 2012 gave the Scottish Parliament the power to set a different rate of income tax in Scotland, which took effect from 6 April 2016. The Scotland Act 2016 extended these powers as of 6 April 2017, enabling the Scottish Parliament to set thresholds as well as the rates and introduce additional bands.

Since having these powers, the Scottish Government has taken several decisions to vary Scottish Income Tax thresholds, rates and bands from the rest of the UK. In summary, these decisions mean:^[58]

• In 2018-19, the UK Basic Rate was split into a Starter Rate (19%), Basic Rate (20%) and Intermediate Rate (21%).
• The Higher Rate has been increased to 41% in 2018-19 and 42% in 2023-24. A decision was also made to increase the Higher Rate threshold by much less than the UK Government did between 2017 and 2021-22.
• The Top Rate has been increased to 46% in 2018-19, 47% in 2023-24 and 48% in 2024-25. The Scottish Government followed the UK Government decision to reduce the Top Rate threshold from £150,000 to £125,140.
• A new Advanced Rate set at 45% was introduced on incomes between £75,000 and £125,140 in 2024-25.

For Scottish Income Tax payers, this has led to an increasingly complex income tax schedule in Scotland compared to the rest of the UK, and a situation where, in 2025-26, the marginal rate of income tax will be higher in Scotland than in the rest of the UK on incomes above £27,492.^[59] The 2025-26 Scottish Income Tax schedule is detailed in Table 2.

Table 2: Scottish Income Tax schedule, 2025-26.

Band	Rate	Threshold
Starter	19%	£12,571 - £15,397
Basic	20%	£15,398 - £27,491
Intermediate	21%	£27,492 - £43,662
Higher	42%	£43,663 - £75,000
Advanced	45%	£75,001 - £125,140
Top	48%	Over £125,140

The Scottish Government’s 2024 Tax Strategy set out a policy plan for Scottish Income Tax until May 2026 which commits to no new bands, no increase in rates, to uprate the Starter and Basic Rate bands by at least inflation and to freeze the Higher, Additional and Top Rate thresholds and to keep over half of Scottish Income Tax payers paying less income tax than they would in the rest of the UK.^[60]

Scottish Income Tax is not a fully devolved tax. HMRC is still responsible for the collection and management of Scottish Income Tax and paying this to the Scottish Government. In addition, Scottish Income Tax only applies to non-savings, non-dividend income. UK Government tax rates still apply to income from savings and dividends and the Scottish Government cannot make changes to the income tax personal allowance.

Revenue-raising options

Table 3 sets out the potential range of options and corresponding levels of devolved powers that would enable the Scottish Government to raise additional revenue from Scottish Income Tax.

Table 3: Scottish Income Tax revenue-raising options.

Stage 1

Lowering the thresholds for different bands. Increasing the rates on bands. Introducing additional bands.

Stage 2

Reforming the personal allowance. Expanding the Scottish Income Tax regime to income from dividends and savings.

Stage 3

Removing tax relief on pension contributions. Taxing Scottish income of non-Scottish residents. Reforming treatment of international income of Scotland-domiciled residents.

The Scottish Government already has powers to change the thresholds and rates of existing Scottish Income Tax bands, as well as introducing additional bands, to raise additional revenue. However, provisions within the 2024 Tax Strategy limits the Scottish Government’s ability to implement any major revenue-raising changes to Scottish Income Tax until at least May 2026.^[61]

Proposals for reform to rates and thresholds are largely centred on impacting people at the higher end of the income distribution. Existing estimates vary based on whether modelling is static or accounts for behavioural impacts, based on Scottish Government and Scottish Fiscal Commission assumptions.

On changing tax rates, static modelling estimates £100m could be raised for every 0.5% increase to the Higher and Top Rate of Scottish Income Tax,^[62] whereas Scottish Government tax ready reckoners suggests a 1p increase to both the Higher, Advanced and Top rate would raise £119m, with the vast majority of that additional revenue (£90m) coming from the Higher Rate change.^[63] This reflects the behavioural change of those in the Top Rate, who are more easily able to convert earned income into business income that is taxed at lower rates.^[64]

On changing Scottish Income Tax thresholds, a significant revenue-raising option would be lowering the Higher Rate threshold to £40,000. This would bring in £502m, even accounting for behavioural changes.^[65] Other changes to thresholds have focused on significantly reducing the income at which the new Additional Rate would be paid. Setting the Additional Rate at £58,285 (covering the top 90% of gross full-time earners in Scotland) would bring in around £260m based on static estimates,^[66] or around £160m with behavioural changes accounted for.^[67]

There is also scope for reform to bands, rates and thresholds at the lower end of the income distribution. Proposed reforms here have mostly been designed to alleviate the higher marginal tax rate of Scottish taxpayers rather than as significant revenue-raising options.^[68] One proposal has also been to scrap the Starter, Basic and Intermediate Rates and replace them with a new 21% Basic Rate.^[69] Scottish Government tax ready reckoners estimate a 1% increase to the Basic Rate would raise £251m.^[70]

Within existing powers, ‘completing’ Income Tax devolution would be an important way to raise greater revenue. This would mean devolving powers over the personal allowance and savings and dividends income to Scotland. IFS analysis from 2013 suggests that reducing the personal allowance by £500 could raise £280m.^[71] There have been no previous estimates of the revenue that could be raised from applying the Scottish Income Tax schedule to savings and dividends income, but the expectation is that this would be modest.^[72] We provide estimates of this reform in chapter 4.

National Insurance contributions

Background

National Insurance contributions are levied on the earnings of employees, the self-employed, and on employers for the earnings of those they employ. Historically, payment of NICs qualified individuals to receive certain social security benefits, in particular the state pension. Over time, the link between NICs paid and benefits received has increasingly weakened, with the exception of the state pension. Today, NICs essentially act as a second income tax. At the UK level, NICs are the second-largest source of Government revenue (after income tax).^[73]

Different types of NICs are paid by employees, employers and the self-employed. NICs are levied at 8% on earnings for employees, an additional 2% on earning for employees who earn above the Upper Earnings Limit (over £967 a week, or £4,189 a month) and 13.8% for employers. The 2024 UK Budget announced a rise in the employer NICs rate to 15%. The self-employed pay 6% on profits of between £12,570 and £50,270, with an additional 2% paid on profits over £50,270.

NICs is fully reserved to the UK Government and collected at a UK level by HMRC. Scotland receives a share of UK-wide NICs revenues as part of the Block Grant.

Revenue-raising options

Table 4 sets out the range of options the Scottish Government would have to raise additional revenue from NICs, as well as the level of powers needed.

Table 4: NICs revenue-raising options.

Stage 1

N/A

Stage 2

N/A

Stage 3

Increasing NICs rate for employers and/or employees. Reforming earnings thresholds and earning limits within NICs. Introducing a new approach to payroll tax.

Reforms to NICs would only be possible in the longer term, with a significant degree of devolution. If Scotland obtained powers over NICs, additional revenue could be raised in a number of ways. The IFS’s analysis of the tax-raising options open to an independent Scotland with full control over tax powers suggested three possible revenue-raising options for NICs:^[74]

• Firstly, simply raising existing NICs rates would generate additional revenue. This could be increased across all of the NICs rate, or a selection of them. Previous estimates have suggested that a 1 percentage point increase to employees’ and self-employed businesses’ main rates, Upper Earnings Limit (UEL) rate and the employer rate could raise an additional £740m.
• Secondly, earnings thresholds could be changed to broaden the tax base through NICs. Previous estimates have found that a £10 per week reduction to the employee, self-employed and employer thresholds and a £100 per week increase to the UEL could raise £250m in additional revenue.
• Thirdly, the UEL for employee income could be abolished, meaning all income would be taxed under the main rate of NICs. Doing so could raise an additional £465m.

In addition, longer-term powers and control could give the Scottish Government scope to consider new ways of levying a payroll tax. One possible way would be to charge a ‘low pay levy’ on those employers who pay no NICs for each of their employee’s earnings below the secondary threshold (£9,100 per year). A rate of 3.8% on those employers with a low-pay business model could raise around £600m a year.^[75] The revenue raised may reduce over time, as changes such as this to payroll taxation would be designed in part to incentivise a shift in employer practices.

Council tax

Background

Additional revenue can also be raised through local taxation, the most common form of which is currently council tax. This is a tax on the value of domestic property someone lives in and, in Scotland alone, raises around £3bn in revenue per year.^[76] Council tax is levied by local authorities, which are responsible for setting the base rate of tax for Band D properties in their area and collecting the tax. The Scottish Government sets the rules for the overall council tax system, as well as the council tax reduction scheme, and has had these powers since 1999.

Local authorities keep most of the revenue raised from council tax in their area to help pay for local services like rubbish collection, roads and street lighting. Council tax accounts for around 12% of total funding for local authorities in Scotland, with the remainder provided by national taxation.^[77] Therefore, additional revenue for a MIG scheme could only be provided through council tax if the reforms needed to achieve this also allowed for less council funding via national taxation.

There is a long-running broad consensus that the council tax system needs reform, having changed little since its introduction in 1993.^[78] It has been argued that the council tax burden is unfairly spread, with people in less expensive homes paying a higher proportion of their property’s value in council tax than those in the most expensive homes.^[79] This makes council tax a regressive form of taxation. The Scottish Government consulted in 2023 on changes to the multipliers for Band E-H properties that were ultimately not taken forward.^[80] In 2025, another consultation was announced on reforms to make the council tax system ‘fairer’.^[81]

Council tax rates in Scotland have also lagged behind increases elsewhere in the UK. Over the last 15 years, the average council tax bill has grown by 60% in England but by only 23% in Scotland.^[82] As a result, there is arguably scope to raise additional revenue from council tax in Scotland by increasing the progressivity of the system and comparability to the tax burden levied through local taxes in other parts of the UK. This is discussed further in chapter 4.

Revenue-raising options

Table 5 sets out the range of options, and the level of powers, the Scottish Government would have to consider if it is to raise additional revenue from council tax.

Table 5: Council tax revenue-raising options.

Stage 1

Change the multipliers. Abolish discounts for single occupants and/or students. Reduce generosity of support from council tax reduction scheme. Further discretion for surcharges on empty and second homes. Revalue properties.

Stage 2

Set minimum level local authorities must charge for Band D properties.

Stage 3

Transition to a new system of local taxation in Scotland, such as a proportional property tax.

In April 2024, changes were made to council tax in Scotland giving more discretion to local authorities to increase the rate charged on second and empty homes.^[83] It has been suggested that this could go further, following the example in Wales where a maximum of 300% of the standard council tax rate can be charged on long-term unoccupied properties.^[84] However, these reforms are intended to change behaviour and could not be relied upon to provide a sustainable long-term revenue source.

Revaluation alone would also be expected to raise minimal revenue without accompanying changes to tax rates. In the event of such a revaluation, half of properties in Scotland would be expected to be in a higher band and half in a lower band, leaving the overall distribution of properties across the bands largely unchanged.^[85]

As part of any revaluation, the Scottish Government has a number of policy options open to them. Additional bands could be introduced to shift the burden of particular revaluation decisions and make the council tax system more progressive.^[86] A revaluation could also be combined with the introduction of a proportional system, whereby tax rates applied to each band are adjusted so that the tax is proportional to the median value of a property in the band.^[87]

At the top end of the spectrum, a new form of proportional property taxation, combined with revaluation, could raise up to £2bn per year if the annual tax rate were set at 0.9% of the property’s value.^[88] Such a change would be a considerable reform. Some have proposed a transitional approach which might only see half of properties in Scotland on the new tax system within 10 years, with local authorities incurring additional administrative costs running two systems in the meantime.^[89]

In the shorter term there are ways to raise additional revenue within the current system. Freezes to council tax rates have reduced revenues in Scotland from council tax considerably. The freeze put in place for 2024-25 is estimated to cost £100M in revenue this year alone.^[90] However, the tax gap between England and Scotland from the cumulative effect of freezes over the past 15 years is more considerable, and is estimated to cost £600-900m per year in lost council tax revenue.^[91] To rectify this, the multipliers could be changed each year to increase revenue over time, or a catch-up policy could be introduced. Such a change was proposed in the 2023 Fairer Council Tax consultation and would have raised £176m a year from changing the multipliers for Band E-H properties.^[92] More modest annual increases have also previously been proposed for all bands, and these are estimated to have the potential to raise £380m per year (after four years).^[93]

Business taxes

Background

Taxation on businesses is another source of additional revenue. Broadly speaking, business taxes fall into two categories.

The first is non-domestic rates (NDRs) which are a tax on non-domestic business property in the public, private and third sectors. NDRs have been fully devolved to Scotland since the onset of devolution. NDR policy, including rates and reliefs, is set by the Scottish Government, but they are administered and collected by local councils. In 2024-25, £3.2bn was raised by NDRs to help fund local services.^[94] The amount of tax paid depends on the rateable value of the property, which is then multiplied by a tax rate based on the property ratable value. Any rates reliefs are then subtracted from this amount. As of 2025, there are a range of reliefs that are available.^[95]

NDR tax rates and rateable values for 2025-26 are set out in Table 6. For 2025-26, the Basic Property Rate has been frozen, the Intermediate and Higher Property Rates have been increased by inflation and a new 40% relief for the hospitality sector has been introduced for premises liable for the Basic Property Rate, capped at £110,000 per business.^[96]

Table 6: NDR tax rates, 2025-26.

Rate name	Rateable value	Tax rate
Basic Property Rate	Up to £51,000	49.8 pence
Intermediate Property Rate	£51,001 to £100,000	55.4 pence
Higher Property Rate	Over £100,000	56.8 pence

The second category of business taxes is corporation tax, which is fully reserved to the UK Government. Corporation tax is levied on the taxable profits of limited companies, after taking into account various deductions (for the costs of running the business) and allowances (for example capital allowances for investment spending). The headline rate of corporation tax is 25%. Government Expenditure and Revenue Scotland estimate that around £6bn of corporate tax revenue is generated in Scotland in 2023-24.^[97]

A separate corporation tax regime is applied to the revenues of oil and gas companies, which is also fully reserved to the UK Government. This includes a 30% ring-fenced corporation tax to prevent taxable profits from oil and gas extraction in the UK being reduced by losses from other activities. In addition, three other taxes are levied: a 10% supplementary charge is levied, a ‘field-based’ petroleum revenue tax and an energy profits levy. Around £5bn is raised from these taxes per year.^[98]

Revenue-raising options

Table 7 sets out the range of options the Scottish Government would have to raise additional revenue from taxes on businesses and the level of powers needed.

Stage 1

Increasing non-domestic rates. Removing or reforming non-domestic rate relief and adjustments. Introducing supplementary charges on non-domestic rates.

Stage 2

Introducing a tax on the profits of Scottish Water.

Stage 3

Replacing or supplementing business rates with a land value tax. Reforming onshore corporation tax. Reforming tax on North Sea oil production, revenues and profits. Introducing levies or windfall taxes on specific industries or sectors.

Table 7: Revenue-raising options from business taxes.

There are a number of ways that additional revenue could be raised through non-domestic rates. Scottish Government tax ready reckoners estimate that a 1p increase to all NDR rates would generate an additional £59m, with the majority of this additional revenue (£42m) generated from the increase to the Higher Property Rate.^[99]

One potentially significant way to increase NDR revenue is to change the system of reliefs. Most years, around a fifth of non-domestic rate liabilities are discounted through reliefs and adjustments, which represents a significant loss of income for local councils and the Scottish Government. Most reliefs that are applied to NDRs often come with little in the way of requirements to meet social or environmental responsibilities or improvements.^[100] Provisional figures for 2023-24 suggest that scrapping the full range of mandatory and discretionary reliefs would raise an additional £722m for the Scottish Government.^[101]

More targeted attention could focus on scrapping the Small Business Bonus Scheme (SBBS), which is the largest single component of NDR relief. In 2023-24 the SBBS was worth £231m.^[102] A Scottish Government-commissioned evaluation of the SBBS by the Fraser of Allander Institute found that between 2008 and 2020 SBBS cost £2.8bn with no clear evidence SBBS enhanced business outcomes, although small businesses themselves perceived there to be benefits from the SBBS.^[103]

Longer-term changes to business rates could include overhauling the current NDR system and replacing it with a commercial Land Value Tax (LVT). Introducing a commercial LVT with a small extra yield (between 3% and 5%) on current NDR yields could raise up to £150m per year.^[104]

With further powers, Scotland could receive control over both onshore and offshore corporation tax. However, there are challenges with how new taxes for onshore corporations and offshore North Sea oil and gas production would operate. For example, where firms operate in more than one part of the UK, it is difficult to know by how much profits are attributed to activities in each location. Furthermore, companies are not required to report their profits in this way, making a distinct onshore corporation tax regime difficult.^[105] Similarly, it is unclear how the ownership of North Sea oil would be divided in the event of a change to Scotland's constitutional settlement. Government Expenditure and Revenue Scotland estimates Scotland has around 80% of the total UK North Sea revenue but this would be a matter for legal argument and negotiation.^[106] Moreover, tax revenues from North Sea oil and gas production are highly uncertain and expected to decline dramatically as a share of national income.^[107]

Wealth and capital taxes

Background

As of 2025, the Scottish Government has control over taxation on the purchase of residential and the purchase and leases of non-residential land or property through the Land and Buildings Transaction Tax (LBTT). LBTT is the Scottish equivalent of Stamp Duty Land Tax (SDLT). LBTT has been a fully devolved tax since April 2015 and LBTT is administered and collected by Revenue Scotland. LBTT has been recognised as more progressive than SDLT in England and Northern Ireland and the Welsh Government’s equivalent Land Transaction Tax (LTT).^[108]

£911m was raised by LBTT in 2024-25, and is forecast to increase to over £1bn per year from 2025-26 to 2029-30.^[109] Rates of LBTT differ for residential and non-residential property and are outlined in Table 8, 9 and 10.

Additional Dwelling Supplement (ADS) is an additional amount of LBTT paid in relation to the purchase of additional properties, for example, second homes, rental properties and holiday homes. The 2025-26 Scottish Budget increased the ADS rate from 6% to 8% with effect from 5 December 2024, and is expected to raise an additional £32m in 2025-26.^[110]

Table 8: LBTT residential purchase rates.

Residential purchase price	LBTT rate
Up to £145,000	0%[111]
£145,001 to £250,000	2%
£250,001 to £325,000	5%
£325,001 to £750,000	10%
Over £750,000	12%

Table 9: LBTT non-residential purchase rates.

Non-residential purchase price	LBTT rate
Up to £150,000	0%
£150,001 to £250,000	1%
Over £250,000	5%

Table 10: LBTT non-residential lease rates.

Non-residential rent price	LBTT rate
Up to £150,000	0%
£150,001 to £2,000,000	1%
Over £2,000,000	2%

The Scottish Government’s 2024 Tax Strategy announced a review of LBTT to be completed by May 2026, looking at the residential and non-residential LBTT arrangements to ensure the policy is still functioning as intended and will inform any future decisions on legislative changes to LBTT.^[112]

The two other current major sources of tax from wealth and capital are administered by the UK Government. The first is Capital Gains Tax (CGT), which is levied on the profit of the sale of an asset that has increased in value. The rate of CGT paid depends on gains above the personal allowance, the income of an individual and the type of asset being sold, and a number of these rates were increased in the 2024 UK Budget.^[113]

The second is inheritance tax (IHT), which is levied on the value of all the assets in an individual’s estate upon their death, after deducting any liabilities, exemptions or reliefs. Assets left to a spouse or civil partner are exempt from IHT. The rate of IHT is normally 40% on the value of an estate above £325,000, although the threshold can rise to £500,000 if a home is left to children, and the rate can reduce to 36% if more than 10% of the estate above the threshold is left to charity.

Revenue-raising options

Table 11 sets out the range of options the Scottish Government would have to raise additional revenue from taxing wealth and capital gains and the level of powers needed.

Table 11: Revenue-raising options from wealth and capital taxes.

Stage 1

Increasing the rates of LBTT. Introducing additional bands within LBTT. Wider reform to LBTT, including:

• removing reliefs and exemptions.
• introducing surcharges.

Increasing the Additional Dwelling Supplement within LBTT.

Stage 2

Introducing a ‘local’ inheritance tax (that could operate around UK-wide IHT).

Stage 3

Reforming Capital Gains Tax, including:

• increasing the CGT rate.
• removing exemptions.
• reducing the tax-free allowance.

Introduce a form of wealth tax. Introducing a tax on the value of land. Removing tax free allowances for interest from savings and/or ISAs. Introducing stamp duty of shares.

LBTT has been largely unreformed since its introduction. Scottish Government tax ready reckoners suggest that a 1 percentage point increase to all residential rates would raise £58m, a 1 percentage point increase to ADS would raise £6m and 1 percentage point increase to the non-residential purchase rates would raise £20m. The Scottish Government estimates that no additional revenue would be generated by applying the increase to residential properties worth over £750,000.^[114]

Landman Economics has modelled a proposal to further increasing the progressivity of LBTT.^[115] This would raise an additional £240m per year in revenue by:

• Splitting the over £750,000 residential property band into two new bands. One covering between £750,000 and £1m, and the other for properties valued at more than £1m with a higher rate of 15%;
• Increasing the £325,000-£750,000 residential rate from 10% to 12%;
• Splitting the over £250,000 non-residential band into two. One covering £250,000-£500,000 at 5%, and a second for properties worth more than £500,000 at 10%;
• Introducing a 15% surcharge for overseas entities/non-UK residents buying property, similar to what is applied to Stamp Duty in England (currently at 5%).

There have been calls for the Scottish Government to request powers for a ‘local’ inheritance tax to be introduced. Depending upon the exact tax design and rate applied, between £200m and £300m of additional revenue per year could be raised by extending the inheritance tax regime in Scotland to those who do not currently pay any UK-wide inheritance tax (with estates worth between £36,000 and £325,000).^[116]

With longer-term powers, Scotland could look to introduce a wealth or land value tax, which could be designed in a number of ways. One way is for a wealth tax system to function similarly to the income tax system with variable rates. Under such a regime, £1.4bn could be raised by introducing a variable annual wealth charge at the following marginal rates on wealth above £1m per household (0.5% per year for wealth between £1m and £2m; 1% per year for wealth between £2m and £5m; and 2% per year for wealth above £5m).^[117]

However, there are a number of complications with introducing a wealth tax. Firstly, there would need to be a new administrative system and continual updating of property valuation, which would bring associated administrative costs and time delays.^[118] Secondly, there is an assumption of a large amount of tax avoidance, especially on financial assets and physical wealth and pensions, but the true extent of this is uncertain.^[119] And finally, research points to highly negative and distortionary effects on capital accumulation (saving and investment) and residential mobility.^[120]

There would be similar challenges for a land value tax (LVT) to be introduced. The precise yield and distributional effects of a LVT in Scotland cannot be estimated without a clear understanding of land values. Indeed, one of the prerequisite challenges for the introduction of a LVT is that it would be necessary to carry out technical work to value all land in Scotland (or at least all land used for domestic purposes, if the tax were for domestic land only) and gather a complete register of all land in Scotland.^[121]

Value Added Tax

Background

Indirect taxes are taxes on the production or sale of goods and services, that are ultimately passed onto consumers through prices.^[122] Indirect taxes are the second largest source of government revenue in the UK, with Value Added Tax (VAT) making up the biggest share of this as the UK’s most common and widespread indirect tax.^[123]

As of 2025, VAT remains fully reserved to the UK Government, and it is collected at a UK level by HMRC. Scotland receives a share of UK-wide VAT revenues as part of the Block Grant. However, work has begun to make VAT an ‘assigned tax’ in Scotland. This would mean a proportion of VAT revenues raised in Scotland would be directly assigned to the Scottish budget each year, with a corresponding reduction in the Block Grant as is currently in place for other devolved taxes.^[124] This work is currently on hold due to difficulties with identifying a methodology to apportion VAT revenues to Scotland. This is because VAT returns submitted by businesses do not yet distinguish where in the UK the VAT was paid. It is estimated that VAT assignment for Scotland could be in the region of £7.4bn per year (based on 2023-24 figures).^[125]

The standard rate of VAT in the UK is charged at 20%, with a reduced rate of 5% or a zero rate levied on some types of goods and services that are deemed essentials or ‘merit goods’ such as food, children’s clothing, and books and newspapers.^[126] There are also exemptions for some types of goods and services which are deemed as essentials or too impractical to levy VAT on.

Revenue-raising options

Table 12 below sets out the range of options the Scottish Government would have to raise additional revenue from VAT, and the level of devolved powers needed.

Table 12: VAT revenue-raising options.

Stage 1

N/A

Stage 2

N/A

Stage 3

Broaden the tax base by removing zero-ratings or exemptions. Increasing VAT rates. Changing the VAT threshold for small businesses. Tackling avoidance to reduce the ‘VAT gap’.

If Scotland obtained full powers over VAT, additional revenue could be raised in a number of ways. Firstly, the tax base could be expanded, either by bringing exempt goods or services into VAT or by bringing more goods and services into a higher band. An international example of such an approach can be found in New Zealand, which has one of the broadest tax bases for consumption taxes in the world. This enables them to collect the highest rate of VAT revenue as a proportion of GDP out of all the OECD countries, despite having a lower rate at 15%.^[127] Currently the standard rate is charged on less than half the potential consumption tax base in the UK.^[128] Zero-rating alone is thought to cost the UK government £50bn per year in VAT revenue compared to a scenario where the standard rate were levied on these goods and services.^[129]

Secondly, the VAT threshold for small businesses could be lowered. At £90,000, the UK has the highest threshold in the OECD below which small businesses are exempt from charging or collecting VAT.^[130] It was estimated in 2017 that lowering the VAT threshold to £43,000 could raise £1-1.5bn per year across the UK.^[131] Another option would be to tackle the ‘VAT gap’ – namely, the amount of VAT revenue not collected because of avoidance, evasion or error. This was estimated to be £8.1bn for the UK as a whole in 2022-23.^[132] However, in practice it is difficult to determine how much additional revenue could be raised by implementing policies to reduce tax avoidance and evasion.

Finally, simply raising existing VAT rates could also generate additional revenue. Previous estimates are that a 1 percentage point increase in the standard rate of VAT in Scotland would raise £430m per year, with £35m and £165m per year raised from a 1 percentage point increase in the reduced rate and zero-rate respectively.^[133]

In theory, reduced rates and zero rates are applied to essential products or services with a clear social benefit. However, some argue there are inconsistencies that distort consumers’ consumption behaviour, and some exempt or zero-rated goods have higher rates of consumption amongst higher income groups. Consequently, there are some fairness considerations as consumption taxes are broadly regressive. This is discussed further in chapter 4.

Other Indirect Taxes

Background

Scotland currently has powers over several indirect taxes. This includes a Scottish Landfill Tax introduced in 2015. Both Scottish Landfill Tax rates will increase in 2025-26 to match the planned increase to UK Landfill Tax rates announced in the 2024 UK Budget. This is forecast to raise an additional £6m in 2025-26, relative to the usual inflationary uplift.^[134]

The UK Aggregates Levy was also formally devolved in the Scotland Act 2016 but was not implemented straightaway. In November 2024, the Scottish Aggregates Tax and Devolved Taxes Administration (Scotland) Act received Royal Ascent.^[135] The Scottish Government has indicated that the Scottish Aggregates Tax will go live in April 2026.^[136] In addition, Scotland has devolved powers for Air Passenger Duty, which is due to be replaced by an Air Departure Tax, but as of 2025 this is yet to be implemented.

Revenue-raising options

Table 13 below sets out the range of options the Scottish Government would have to raise additional revenue from other indirect taxes and the level of powers needed.

Table 13: Revenue-raising options for indirect taxes

stage 1

Increasing Scottish Landfill Tax. Implementing and increasing the Scottish Aggregates Tax.

Stage 2

Implementing and increasing Scotland’s Air Departure Tax.

Stage 3

Introduction of a frequent flyer levy. Reforming Insurance Premium Tax (IPT) and taxes on other financial services. Introducing an Online Sales Tax. Reforming or increasing excise duties on fuel and/or ‘sin’ products. Increasing or reforming environmental levies, including:

• Climate Change Levy.
• Introducing a new Scottish Carbon Pricing System.
• Carbon Emission Land Tax on large landholdings.
• Introducing Congestion Charges

Scotland could raise additional revenue from its existing devolved indirect taxes by increasing tax rates and fully implementing the Air Departure Tax and Scottish Aggregates Tax. For instance, a series of static estimates have estimated that a frequent flyer levy combined with the Air Departure Tax in Scotland could raise £50m per year, increasing the Scottish Aggregates Tax by 30% could raise £18m per year and increasing the existing Landfill Tax by 30% could raise £30m.^[137]

Additionally, Scotland could look to implement new local taxes under its existing powers. These powers have been used to implement a visitor levy,^[138] and consideration is being given to a cruise ship levy.^[139] However, it may be difficult to use taxes like this to fund national public spending, as it would likely be tied to local activities or pressures.^[140]

With further powers, Scotland could raise additional revenue from increasing existing excise duties, which are levied on the importation or manufacture of specific goods and paid by the seller. The Scottish Government could either unfreeze rates for fuel and alcohol which have been frozen since 2011, or increase rates on a range of duties. Estimates have suggested the UK will have lost £20bn in total revenue between 2021-29 from not increasing fuel duties.^[141] Increasing fuel, alcohol and tobacco duties in Scotland by 10% could raise £335m per year.^[142]

There may be additional excise duties that could be introduced on other goods and services, or further green indirect taxes, such as a tax on the use of private jets which could raise in the region of £50-100m per year.^[143] The 2025-26 Scottish Budget also confirmed options for a Carbon Land Tax to reduce greenhouse gas emissions from land are under consideration.^[144] The challenge with these types of taxation is that they are intended to induce behaviour change. Therefore, if they are effective at meeting their policy intention, they will not provide a sustainable tax revenue.^[145] Alternatively, the revenue raised from such a behaviour change tax may need to be earmarked to pay for the externalities that the overconsumption of these goods creates.^[146]

Reforming consumption taxes on online sales or financial services may be another option, but these are challenging to administrate effectively. These types of consumption are also already, at least partially, covered by other forms of taxation which would be likely to need reducing as part of the reforms, such as the Financial Services Levy, VAT and Insurance Premium Tax, reducing the additional revenue that would be raised.