Scottish Budget 2026 to 2027: Scottish tax ready reckoners

Income Tax

The Scottish Parliament has the power to set Income Tax rates and bands for the non-savings non-dividend (NSND)^[4]. The Scottish Parliament must pass a Scottish Rate Resolution before the start of the tax year setting Income Tax policy for the year ahead. It is not possible to make any in-year changes to Income Tax policy. 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 Parliament. Income Tax on savings and dividends is also reserved. Table 2 sets out the rates and bands under the announced policy for 2026-27 which forms the counterfactual for the policy costings. In other words, the Income Tax ready reckoners measure revenue impacts from a policy in addition to the Scottish income Tax policy in Table 2.

The Income Tax policy choices available to the Scottish Parliament include: the number of tax bands; the tax rates that apply to these bands; and the thresholds where bands begin and end. The ready reckoners in Table 1 can be used to show the additional revenue raised (or foregone) from individual components as well as any combination of these, for example:

• The revenue implications of any combination of policies can be broadly estimated by summing the impact of each individual change. For example, a policy which adds 1p to each rate would raise around £652 million in estimated revenue (over and above the changes announced for 2026-27). However, if thresholds are changed substantially, and combined with rate changes, there might be interactions which mean that the policy effects are not purely additive.
• The estimates can also be scaled up or down to some extent, in that a 2p rise in a tax rate will broadly raise twice as much as a 1p increase. This approach is reasonable for changes of up to a few percentage points. However, caution should be applied when assessing larger changes, particularly to the Top rate, as top earners are much more likely to be responsive to tax changes.
• For rate changes, the impacts of tax increases and tax decreases are also broadly symmetric so that a 1p cut in the Intermediate rate would cost around £154 million. However, caution needs to be applied for threshold changes where the effects of increases and decreases are not fully symmetric.
• Threshold changes cannot be scaled up or down as easily, as any change in the band, or threshold, would affect the tax base itself, i.e. the number of taxpayers affected by the policy.
• The table illustrates increases to the Starter Rate band of +/-£100 and for other thresholds of +/-£1,000. To put this into context, inflationary uprating of the Income Tax bands at 3.8% (the September 2025 Consumer Price Index typically used for uprating) would be equivalent to a £1,177 increase in the Higher rate threshold.
• No further policy changes to the Top rate threshold have been assessed at this stage. This is because the Scottish Government cannot make changes to the Personal Allowance taper rate or taper thresholds. The UK-wide Personal Allowance is withdrawn for taxpayers who earn more than £100,000 at a rate of £1 for every £2 earned over £100,000. Taxpayers earning more than £125,140 do not benefit from the Personal Allowance. These taxpayers face a marginal rate of Income taxation of 67.5% on earnings between £100,000 and £125,140. Reducing the Top rate threshold below £125,140 would increase this marginal rate further.
• In the case of the Top rate, revenue effects are particularly uncertain as there is a risk that behavioural responses might significantly reduce the additional yield, or costs, from a rate change. Based on the SFC’s current behavioural framework, these policies would have a relatively modest impact on tax revenues. However, as illustrated in the Scottish Government’s evaluation of the 2018-19 policy changes, there is also a risk that any increase in the Top rate could lose revenue^[5] and this risk could increase, the greater the divergence with the highest marginal rate in the rest of the UK.
• The ready reckoners do not include any potential effects of forestalling which might occur when taxpayers move income across years to minimise their tax liabilities. This is particularly relevant where tax policy changes are known well in advance of the beginning of the tax year.

Areas of uncertainty

There are a number of uncertainties when it comes to producing ready reckoners. The first is in the scale of the behavioural response. Evidence on behavioural responses, such as Scottish taxpayers emigrating or withdrawing from the labour force, is an essential consideration for tax policy decisions. HMRC (working with Scottish Government) published two reports^[6] last year on better understanding behavioural response and taxpayer movement across the UK. The research suggests that overall net migration to Scotland has been positive and increasing since Income Tax policy in Scotland has diverged. However, net migration of people with taxable income would most likely have been higher in the absence of the move to a five-band system in 2018-19, and the analysis could not find evidence of the effect persisting in future years. The research also did not find any evidence that the 2018-19 change affected decisions about whether to work or not. With 2023-24 data now available, analysis is being undertaken on more recent policy changes. The SFC regularly review their behavioural assumptions, and the ready reckoners set out above are based on their latest behavioural parameters which remain unchanged from the December 2024 budget.

The second area of uncertainty relates to the economic assumptions underpinning the costings. For example, how fast nominal earnings grow is a key determinant in the extent to which people are pulled into higher tax bands, also known as fiscal drag. This effect is more pronounced as UK-wide allowances and some Scottish bands and thresholds are frozen in 2026-27. Fluctuations in wage growth can have a material impact on costings, as seen in the latest Autumn Budget, with the OBR forecasting higher growth in income tax receipts due to higher nominal wages than first expected in March 2025.

Finally, detailed information on the Income Tax base is only available with a significant lag, largely due to the timing of Self Assessment receipts. The Income Tax model is based on 2022-23 microdata, aligned to the 2023-24 outturn, thus introducing another source of uncertainty as changing macroeconomic conditions since then will not be fully reflected in the data.