Scottish Budget 2025 to 2026: distributional analysis of the Scottish Budget

Scottish Budget 2025 to 2026: distributional analysis

This paper provides an analysis of the impact of tax, social security and key spending measures included in the Scottish Budget 2025-26 on households in Scotland. It assesses effects on households across different income levels, age groups, and household characteristics.

Distributional analysis provides a key insight into the impact that Scottish Government policies are having on inequality and which groups receive the greatest support. For the first time, the distributional analysis is extended to include key resource spending measures.

Summary and key points

This analysis shows:

• The Scottish tax and social security system is progressive and redistributes from high income households to low income households. The higher a household’s income, the greater the share of their income they pay in income taxes, and the less they receive in social security.
• Differences between Scottish and UK Government policy since the devolution of tax and social security powers in 2016 mean that the system in Scotland is more progressive than it would have been without changes made under devolution.
• As a result, on average, households in the lower half of the income distribution are around £450 better off a year than they would be under UK Government tax and social security policies.
• Overall, around 62% of households in Scotland are better off or unaffected under the Scottish tax and social security system.
• Scottish Child Payment is the largest single contributor to the improved financial resources of low-income households relative to the rest of the UK, while the impact on higher income households is driven by the Income Tax system.
• The Scottish Government decision to provide a payment to those not in receipt of a relevant qualifying benefit means most pensioner families will be £100 better off than in the rest of the UK.
• Scottish Income Tax changes – Increases to the Basic and Intermediate rate threshold, while freezing the Higher, Advanced and Top rate thresholds, mean that almost half (47%) of Scottish households are better off, with over three-quarters (76%) of households either better off or unaffected as a result.
• Increases to the Basic and Intermediate rate thresholds have a small positive impact in the bottom half of the income distribution. The negative impact of frozen thresholds principally falls on the highest earning 20% of households, with the top 10% paying an average of 0.1% of their income (around £130) more.
• Reform of the Pension Age Winter Heating Payment results in a fairly uniform average loss across the distribution compared to universal eligibility.
• Overall, the distribution of public spending on health, schools, transport and funded early learning and childcare is similar across income groups, although considering the progressivity of the tax system this is redistributive. Spending is a greater share of household income for those in low income households across all of the areas.

A detailed description of the methodology used to produce this analysis is included in the annex of this note.

Scope of this analysis

The first part of this paper analyses the impact of the Scottish tax and social security system on household incomes. This is shown both in isolation and in comparison to the system in place in the rest of the UK.^[1] Understanding the impact of the tax and social security system as a whole is important context for considering the changes made in an annual Budget.

The second part of this paper analyses some of the policy changes announced or confirmed in the Scottish Government budget, namely:

• The Scottish Government policy to target £200 and £300 payments of Pension Age Winter Heating Payment (PAWHP) at families in receipt of a relevant qualifying benefit while providing £100 payments to other pension age families.
• Increases of 3.5% to the Basic rate and Intermediate rate thresholds of Income Tax, while continuing to freeze the Higher, Advanced and Top rate thresholds.

A box also considers the potential impact of changes to employer National Insurance Contribution rates and thresholds on households.

The first two parts of this analysis only include policies that affect the financial resources available to households – i.e. personal taxes and cash benefits. They do not incorporate in-kind benefits (such as free school meals or free early learning and childcare).

The third part of this paper extends the analysis to public spending for the first time considering the following areas:

• Health
• Schools
• Early Learning and Childcare
• Transport

All impacts on household incomes are shown excluding any behavioural responses. This is particularly important when considering impacts of tax policy on higher income deciles, where behavioural responses to policy changes are likely to be greatest. The analysis may not reflect impact on the very richest households.

In total modelling of public spending accounts for almost half of all government resource spending, as detailed in Table 1 below. A full list of policies incorporated is included in the methodological annex.