Scotland Act 2016 implementation: tenth annual report

5. Block Grant Adjustments, Reconciliations and Indexation

As part of the 2016 Fiscal Framework Agreement, it was agreed that the Scottish Government’s block grant would be adjusted to represent the impact of the transfer of greater fiscal powers to the Scottish Government. Deductions to the block grant reflect that the Scottish Government now retains revenues from some devolved taxes and additions to the block grant reflect the devolved social security benefits that the Scottish Government is responsible. These adjustments are called block grant adjustments (BGAs).

2025-26 Developments

Forecast BGAs

40. The latest forecast BGAs are set out in the Scottish Government’s Fiscal Framework Data Annex^[7].

41. For the Scottish Budget 2025-26, BGAs were based on forecasts published by the Office for Budget Responsibility (OBR) alongside the 2024 UK Autumn Budget that preceded the Scottish Budget.

42. These forecast BGAs were subsequently used to calculate in-year reconciliations, on the basis of the comparison between the BGAs which underpinned the 2025-26 Scottish Budget and the BGAs agreed at the UK Autumn Budget 2025. The in-year reconciliations compared BGAs on Land and Buildings Transaction Tax, Scottish Landfill Tax and social security, resulting in a positive £177 million reconciliation. The main driver of this reconciliation is a positive £151 million reconciliation for Winter Fuel Payment, which is a result of the UK Government reinstating universality of the benefit but recovering the payment from pensioners earning over £35,000 a year through income tax. Further information is provided in paragraphs 51 to 55.

Data update: Fiscal Framework Outturn Report 2025 and Scottish Government's Medium Term Financial Strategy

43. The Scottish Government published its annual Fiscal Framework Outturn Report on 24^th September 2025^[8]. The report outlines tax and expenditure outturn data and the implications of this data on the following Scottish Budget.

44. Table 17 of the Outturn Report showed the total provisional outturn reconciliation to be applied to the 2026-27 Scottish Budget amounted to positive £361.5 million. This is the provisional net impact of the revenue and BGA reconciliations for Income Tax for 2023-24, and for the BGA reconciliations for fully devolved taxes and social security benefits expenditure for 2024-25.

45. At the 2024 UK Autumn Budget, provisional 2023-24 social security outturn was used to calculate the social security reconciliation applied to the 2025-26 Scottish Budget due to the unavailability of final 2023-24 Department for Work and Pensions (DWP) outturn. Following the DWP’s publication of UK Government welfare expenditure outturn for 2023-24 in November 2024, the reconciliation was reduced by £7.2 million. The Scottish Government elected to defer the negative £7.2 million impact to the Scottish Budget 2026-27, as permitted under the terms of the Fiscal Framework. Therefore, the positive reconciliation of £361.5 million in 2026-27 was reduced to positive £354.4 million.

46. The social security reconciliation to be applied to the 2026-27 Scottish Budget was also based on provisional social security outturn. DWP published their final outturn on 18 December 2025, which reduced the reconciliation for social security from positive £5.3 to negative £5.2 million. The Scottish Government elected to defer the negative £10.5 million impact to the Scottish Budget 2027-28, as is permitted under the Fiscal Framework.

47. The Scottish Government’s Medium-Term Financial Strategy^[9] (MTFS) was published on 25 June 2025. Annex F (Fiscal Framework – Data) outlines the forecasts for tax revenues and BGAs, social security and non-tax revenue at the time of publication. These forecasts were then updated alongside the Scottish Budget 2026-27.

Impact of outturn changes on Scottish Budget 2025-26

48. BGAs are usually considered final when outturn is applied, with a final reconciliation to account for the difference between forecast and outturn-based BGAs. However, several outturn changes have occurred in recent years, further details of which can be found on page 15 of last year’s report^[10].

Income Tax Reconciliation

49. Outturn data for Income Tax for 2023-24 was published by HMRC on 10^th July 2025 and a reconciliation of positive £406 million^[11] was applied to the Scottish Budget 2026-27. Further information on the reconciliation can be found in the Fiscal Framework Outturn Report^[12].

Aggregates Tax BGA

50. Following the introduction of SAT, the 2026-27 Scottish Budget was the first budget with an Aggregates Tax BGA deducted from the block grant. This BGA requires a bespoke approach, as outturn data disaggregated at a country level is not available for the year prior to devolution. A mechanism – as agreed between ministers at the Joint Exchequer Committee in October 2025 – is outlined in paragraph 15.

Pension Age Winter Heating Payment & Tax Recovery BGA

51. The Scottish Government’s Pension Age Winter Heating Payment (PAWHP) was launched in winter 2024, for which there is a corresponding BGA for the UK equivalent benefit Winter Fuel Payment (WFP). The baseline BGA forecast corresponds to UKG’s WFP expenditure in Scotland in the year prior to its devolution (2023-24).

52. Following the UK Government’s policy change on WFP in June 2025, the UK Government issued its Winter Fuel Payments universally to all pensioners and will recover payments made to pensioners with an individual income of over £35,000 through the Income Tax system. The Scottish Government elected to mirror the policy for its equivalent benefit, Pension Age Winter Heating Payment.

53. This led the governments to agree a bespoke arrangement for the WFP BGA. The Scottish Government will receive the Winter Fuel Payment BGA on a gross UK Government expenditure basis, rather than net of the expenditure recovered through Income Tax. The UK Government will then retain the payments that are recovered via Income Tax from pensioners with an individual income over £35,000.

54. As different rates apply for the Pension Age Winter Heating Payment in Scotland, the UK Government will recover more per person in Scotland than it would if the WFP policy applied in Scotland. The Scottish and UK governments have agreed that the difference between the two will be accounted for with an additional Winter Fuel Payment Tax Recovery BGA. The BGA applied to the 2026-27 Scottish Budget is based on HMRC’s forecasts of the difference between the amounts recovered, which will be reconciled to outturn.

55. The first Winter Fuel Payment Tax Recovery BGA was agreed at UK Autumn Budget 2025, with £1.3 million added to the block grant for 2026-27. A one-off in-year reconciliation was applied for 2025-26, with £0.5m added to the 2025-26 block grant. From 2026-27 there will only be final reconciliations for outturn.

Future plans

56. The UK and Scottish governments are working closely together to agree BGA arrangements for when APD is devolved, taking account of the provisions of the Fiscal Framework agreement.