Scottish Budget 2025 to 2026

Chapter 2 Tax Policy

Context and Tax Strategy

The Scottish Government has taken bold and necessary decisions on tax in recent years, with devolved tax forecast to contribute £24.6 billion^[1] to the Scottish Budget in 2025-26. These revenues are vital for investment in public services in Scotland.

We have continued to take a progressive approach to tax in this Budget, prioritising those who are most in need of support. We will also continue to ensure that more than half of taxpayers pay less Income Tax in Scotland than in the rest of UK in 2025-26, and until the end of the Parliament.

The tax powers at the Scottish Government’s disposal remain limited, and the interactions with the UK Government tax system and their fiscal choices have real and direct impacts on our own tax choices and revenues. Within this context, it is important the Scottish Government sets out our strategic approach to tax, a core pillar of our Medium Term Financial Strategy.

Alongside this 2025-26 Scottish Budget we are publishing Scotland’s Tax Strategy: Building on our Tax Principles^[2]. The Strategy sets out our medium-term ambitions for how the tax system should develop to support the delivery of our four government priorities. It sets out how Scotland’s tax system will continue to support public service delivery, provide stability for taxpayers and foster an effective and efficient tax environment for business and the economy.

Our core tax principle of engagement has also been integral to the development of the Strategy, which has been informed by engagement with a broad range of stakeholders including businesses across Scotland, think tanks, academics, civic society groups and tax professionals.

That approach to engagement has also informed the Scottish Government’s approach to policy decisions taken in this Budget and our annual pre-budget engagement with stakeholders is summarised in: Public Attitudes to Tax^[3].

Income Tax

The Scottish Parliament has the power to set the Income Tax rates and bands for the non‑savings, non‑dividend income of Scottish taxpayers. Responsibility for the remainder of the Income Tax system, which includes all reliefs and exemptions, as well as setting the UK‑wide Personal Allowance and its associated taper rate, are reserved to the UK Parliament. Income Tax on savings and dividends income is also reserved.

Policy

Our tax policy decisions at this budget will continue to deliver our progressive approach in Scotland, while raising substantial revenue to support the delivery of our public services. This means we are asking those with the broadest shoulders to contribute more.

The SFC have estimated that our Income Tax policy choices since devolution will raise up to an additional £1.7 billion^[4] in 2025-26 compared to if we had matched UK Government policy. Income Tax policy proposals for 2025-26 will see the Higher, Advanced and Top rate thresholds maintained at £43,662, £75,000 and £125,140 respectively.

The Starter rate band will increase by 22.6% and the Basic rate band by 6.6%. The effect of this will be to increase the thresholds at which taxpayers pay the Basic rate and Intermediate rate by 3.5%, significantly more than inflation – measured by the September 2024 annual Consumer Price Inflation (CPI) of 1.7%. This will ensure that we maintain our commitment to protect lower income households, where more than half of taxpayers will pay less Income Tax than they would elsewhere in the UK. This continues our distinct approach to taxation in Scotland, delivering the most progressive tax system in the UK.

Recognising the importance of providing stability and certainty to taxpayers and businesses across Scotland, the Tax Strategy sets out that, to the end of this Parliament, we will:

• not introduce any new bands or increase the rates of Scottish Income Tax.
• maintain our commitment that over half of Scottish taxpayers will pay less Income Tax than they do in the rest of the UK.
• uprate the Starter and Basic rate bands by at least inflation.

*Assumes individuals are in receipt of the Standard UK Personal Allowance.

**Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

Based on current SFC forecasts we estimate that taxpayers earning around £30,300 will pay slightly less Income Tax than they would elsewhere in the UK in 2025-26. The policy set out in this Budget is proposed to take effect from the start of the tax year on 6 April 2025.

Scottish Rate Resolution

The Scottish Parliament must pass a Scottish Rate Resolution each year to set the rates and bands for Scottish Income Tax. A draft of the motion setting out the proposed Scottish Income Tax rates and bands for 2025-26, and an accompanying explanatory note, is available on the Scottish Government’s website.

Forecast

The SFC forecast that Income Tax will raise £20,477 million in 2025-26, an increase of 3% compared to their most recent forecast in December 2023. Maintaining the Higher, Advanced and Top rate thresholds at their current level in nominal terms is forecast to raise £76 million in 2025-26. Above-inflation increases to the thresholds for paying the Basic and Intermediate rates will lower revenue by £24 million in 2025-26. Together, the additional revenue raised by the policy package is forecast by the SFC to be £52 million in 2025-26.

Land and Buildings Transaction Tax (LBTT)

LBTT applies to residential and non-residential land and buildings transactions (including commercial leases) where a chargeable interest is acquired. The Additional Dwelling Supplement (ADS) is payable, as part of LBTT, on purchases of all relevant residential properties for £40,000 and above.

Policy

We will continue to maintain residential rates and bands at their current level for LBTT. This preserves our progressive system, delivering certainty and stability for taxpayers.

The First-Time Buyer Relief will continue to be available. This has the effect of increasing the residential nil rate band from £145,000 to £175,000 for first-time buyers. In the period from introduction to the end of September 2024, 80,740 first-time buyers have benefited from the relief, saving up to £600 of tax on the purchase of their first home.

We will also maintain current non-residential LBTT rates and bands, which remain broadly competitive in a UK context and again provides certainty and stability for taxpayers.

The Additional Dwelling Supplement (ADS) will increase from 6% to 8% with effect from 5 December 2024. This increase will not, however, apply to transactions for which legal missives have been signed on or before 4 December. The SFC forecast that this increase will raise £32m in additional revenue in 2025-26. The increased rate also supports the Scottish Government’s commitment to protect opportunities for first-time buyers in Scotland.

We will conduct, over the remainder of this Parliament, a review of LBTT, to support an evaluation of key aspects of the tax legislation. The review will commence in Spring 2025 and consider various aspects of the residential and non-residential arrangements for LBTT to ensure their policy intent continues to be met. As part of this, we will further explore the impact of the ADS where exceptional circumstances or events occur. We will engage extensively with stakeholders throughout this process. The review will support decisions in the next Scottish Parliament on whether any legislative changes should be brought forward.

Following consideration of the concerns expressed by investors and other organisations, we will, in early 2025, publish a consultation on draft legislation to provide relief from LBTT on the exchange of units within Co-ownership Authorised Contractual Schemes (CoACS) investing in Scottish property. This will provide for consistency with existing arrangements in the rest of the UK.

In the context of the current investment landscape, we will also consult to seek views on the case for introducing a LBTT relief for the seeding of properties from existing unauthorised investment vehicles into Property Authorised Investment Funds (PAIFs) and CoACS. In addition to exploring the costs and benefits of this measure, the consultation will consider the role of tax in supporting the Scottish Government’s overall ambitions to encourage commercial investment in Scotland.

The Scottish Government will also in early 2025 lay legislation before the Scottish Parliament to provide additional clarity on the clawback arrangements for sub-sale development relief and to provide for the availability of LBTT group relief in instances of non-partition demergers. This follows detailed consideration of the points raised during Parliamentary scrutiny of the Aggregates Tax and Devolved Taxes Administration (Scotland) Act 2024.

Rates and Bands

The rates and bands in 2025-26 will be as follows.

*If the first-time buyer relief applies, the effect is to increase the nil rate band to £175,000.

*LBTT on lease premiums is payable at the same rates and bands as non-residential conveyances.

In addition, the ADS may apply to the total price of the property for all relevant transactions of £40,000 or more, and will be charged in addition to the rates set out above. This will apply at a rate of 8% for transactions with an effective date from 5 December 2024, unless the transitional provisions apply.

Forecast

The forecasts for Land and Buildings Transaction Tax revenues are set out in Table 2.06:

Figures may not add due to rounding.

Scottish Landfill Tax (SLfT)

SLfT applies to the disposal of waste to landfill, charged by weight on the basis of two rates: a standard rate; and a lower rate for less polluting materials.

Policy

SLfT rates are intended to provide a financial incentive to support a more circular economy, and the delivery of ambitious targets to reduce waste, increase recycling and cut waste going to landfill.

We will introduce legislation to increase the standard and lower rates of SLfT from 1 April 2025 so that they are consistent with the announced UK Landfill Tax rates for 2025-26. This is consistent with previous Scottish Government policy and addresses the risk that lower rates could result in the movement of waste to Scotland from the rest of the UK. It also takes account of the extent to which the rate of inflation in recent years has outstripped the annual increases in SLfT rates.

We are also commissioning independent research on the ongoing effectiveness of the lower rate of Scottish Landfill Tax in supporting the Scottish Government’s circular economy and waste objectives. This will support decisions at future Scottish Budgets.

The SLfT arrangements also encourage landfill site operators to make a financial contribution to community and environmental projects through the Scottish Landfill Communities Fund (SLCF). Landfill operators can voluntarily contribute a capped proportion of their landfill tax liability to the SLCF and claim 90 per cent of the contribution as a tax credit. We will maintain the cap at its current level for 2025-26.

The latest Scottish Fiscal Commission forecasts show that SLfT revenues will decline significantly once the legislative ban on the landfilling of all biodegradable municipal waste comes into force on 31 December 2025. This decline in revenues will mean that the SLCF will not be viable in its current form from 2026-27 onwards, in particular as the costs of administration will exceed the level permitted under the regulations. The Scottish Government will therefore conduct a public consultation in 2025 to support decisions on the future of the fund.

Rates

We will introduce legislation to increase from 1 April 2025:

• the standard rate of SLfT to £126.15 per tonne; and
• the lower rate of SLfT to £4.05 per tonne.

Landfill operators will remain able to contribute a maximum of 5.6 per cent of their tax liability to the SLCF in 2025-26.

Forecast

The forecasts for Scottish Landfill Tax revenues are set out in Table 2.07:

*Adjusted downwards for payments to the SLCF.

Non-Domestic Rates

Non-domestic rates (NDR) (sometimes called business rates) are a local tax levied on lands and heritages used for non-domestic purposes in the public, private and third sectors. NDR are administered and collected by local authorities, who ultimately retain all the NDR revenue they raise to help fund the local services they provide. National NDR tax rates and reliefs are confirmed annually by the Scottish Government.

Rates

The amount of tax due is based on the rateable value of the property multiplied by the Basic Property Rate (‘poundage’), the Intermediate Property Rate, or the Higher Property Rate, depending on the property’s rateable value, minus any reliefs which the property is in receipt of. The rates are set by Scottish Ministers. Independent Assessors set the rateable value of a non-domestic property, which is based on the notional annual rent the property would attract on the open market if vacant and to let. Non-domestic properties are periodically revalued to reflect prevailing economic circumstances. The last revaluation took effect on 1 April 2023 with a tone date of 1 April 2022. The next revaluation is scheduled for 1 April 2026 with a tone date of 1 April 2025.

The Scottish Budget will support small businesses by freezing the Basic Property Rate, which is charged to properties with a rateable value up to and including £51,000, at 49.8p. This delivers the lowest such rate in the UK for the seventh year in a row and is expected to save ratepayers £9 million compared to an inflationary increase, which would have delivered a Basic Property Rate of 50.6p. Together with the Small Business Bonus Scheme, this freeze to the Basic Property Rate will protect over 200,000 small properties.

The other rates will rise by inflation: the Intermediate Property Rate, which applies to properties with a rateable value of between £51,001 and £100,000, will be charged at 55.4p; and the Higher Property Rate of 56.8p will be charged on properties with a rateable value above £100,000.

We continue to ensure that over 95 per cent of non-domestic properties, those with a rateable value up to and including £100,000, are liable for a lower property tax rate than anywhere else in the UK.

Reliefs

This Budget continues to support our businesses and communities with a strong NDR relief package including maintaining the Small Business Bonus Scheme and the Business Growth Accelerator reliefs, both the most generous of their kind in the UK, as well as a number of other reliefs including Day Nursery and Fresh Start reliefs, which do not exist in England.

We will offer a 40 per cent relief in 2025-26 to properties in the hospitality sector (including Grassroots Music Venues with a capacity of up to 1,500) which are liable for the Basic Property Rate (those with a rateable value up to and including £51,000), capped at £110,000 per business.

Recognising the specific challenges faced by the hospitality sector in island communities, we will also continue to offer 100 per cent relief in 2025-26 for hospitality premises (including Grassroots Music Venues with a capacity of up to 1,500) located on islands as defined by the Islands (Scotland) Act 2018, and in three prescribed remote areas (Cape Wrath, Knoydart and Scoraig), capped at £110,000 per business.

Taken together, we estimate these hospitality reliefs could benefit up to 13,000 properties. We also remain committed to working with the hospitality and other sectors, in the New Deal for Business Non-Domestic Rates sub-group, on the long-term issues that they have raised.

The Budget will also maintain all other existing NDR reliefs as per previous Scottish Budgets. This includes the multi-year transitional relief schemes announced in Budget 2023-24 and introduced to protect those properties which saw the biggest increases in rateable values at the 2023 revaluation. These transitional reliefs will offer the following in 2025-26 and ensure that the gross bills of an estimated 10,000 properties are lower than they otherwise would have been:

• General Revaluation Transitional Relief will cap (compared to 2024-25) annual increases in NDR liabilities due to the 2023 revaluation in cash terms at 37.5 per cent for small properties with rateable values up to and including £20,000, 75 per cent for those with rateable values from £20,001 up to and including £100,000 and 112.5 per cent for those over £100,000.
• Small Business Transitional Relief will ensure that for those properties that lost or saw a reduction in Small Business Bonus Scheme relief, or Rural rates relief eligibility, due to the 2023 revaluation, the maximum increase in the rates liability per property relative to 31 March 2023 will be capped at £1,800.

In total, NDR reliefs funded by the Scottish Government are forecast to save ratepayers £731 million in 2025-26.

NDR reliefs are subject to the domestic subsidy control regime as set out in the Subsidy Control Act 2022.

Having committed to exploring the reintroduction of a Public Health Supplement for large retailers in advance of this budget, following exploratory discussions with stakeholders and taking into consideration cumulative burdens, including UK Government increases in employer national insurance contributions, we have no plans to introduce this at this time.

We are committed to a fair and transparent non-domestic rates system, one that is not undermined by avoidance tactics and this is why, to support administration costs, from 1 April 2025 we will allow councils to retain 50% of additional NDR revenue raised from the use of their anti-avoidance powers under the Non-Domestic Rates (Miscellaneous Anti-Avoidance Measures) (Scotland) Regulations 2023.

The Retail, Hospitality and Leisure relief previously available from 1 April 2020 to 30 June 2022 to mitigate financial hardship during the COVID-19 pandemic will close for applications on 31 March 2025.

Forecast tax revenues for NDR from 2024-25 are set out in Table 2.09 below. The NDR Pool is forecast to be in surplus in 2024-25 and we have therefore taken the decision to balance the forecast deficit in future years in a phased manner by 2028-29.

Prior year adjustments in a given year are generally the difference between the Provisional Contributable Amount (PCA) of NDR income for the preceding year, provided by councils at the start of the financial year (this is separate to the NDR income forecast for that year provided by the Scottish Fiscal Commission and featuring in Table 2.09), and the NDR income outturn for the preceding year. The yearly balance in each year is the sum of prior year adjustments for that year, and of the difference between the PCA and the Distributable Amount for that year.

Note: Figures may not sum due to rounding

*The distributable amount is set before the start of the financial year, based on the forecast of NDR income

**The provisional contributable amount is reported by councils at the start of the financial year, after annual NDR bills are issued to ratepayers

***The outturn NDR income, contributed by councils to the NDR pool

Council Tax

Council Tax is a local tax, with receipts retained by local government and separate from the Scottish Budget. It makes a significant contribution to the funding of public services. Council Tax comprises both property and personal elements. A charge is based on the value of property band; and discounts, exemptions, and reductions to reflect property characteristics or personal circumstances. The primary means of support is the Council Tax Reduction scheme which reduces liabilities for over 460,000 households according to their need and ability to pay.

The Scottish Government is committed to working in partnership with local government on Council Tax policy decisions, and we continue to engage closely with COSLA and local authorities.

Air Departure Tax

The Scottish Government remains committed to introducing Air Departure Tax (ADT) and continues to explore all options to implement the tax in a way that protects Highlands & Islands connectivity and complies with the UK Government’s subsidy control regime. We will review the rates and bands of ADT – including those which apply to private jet flights – prior to its implementation to ensure the tax is aligned with our net zero ambitions. The UK-wide Air Passenger Duty will continue to apply in Scotland until ADT is implemented.

Scottish Aggregates Tax

The Scotland Act 2016 gave the Scottish Parliament the power to introduce a devolved tax to replace the UK Aggregates Levy in Scotland. The UK levy is paid on the commercial exploitation of aggregates, in essence crushed rock, sand and gravel.

The Aggregates Tax and Devolved Taxes Administration (Scotland) Act, which received Royal Assent in November 2024, makes provision for key elements of the Scottish Aggregates Tax.

Subject to the approval of the necessary Scottish and UK secondary legislation, the Scottish Government intends that introduction of a Scottish Aggregates Tax will occur on 1 April 2026.

VAT Assignment

The Scotland Act 2016 allows for the first ten pence of standard rate VAT receipts and the first 2.5 pence of reduced rate VAT receipts raised in Scotland to be assigned to the Scottish Government (known as VAT assignment). As VAT receipts for Scotland are not identifiable from tax returns, assigned VAT will be based on a model of expenditure in Scotland.

The 2023 Fiscal Framework Agreement with UK Government outlines that, further work is required by UK Government and Scottish Government to mitigate the risks of VAT Assignment implementation. Once agreed by both governments, assignment methodology and operating arrangements will require joint UK and Scottish Government Ministerial sign-off.

New taxes and future priorities

We are making progress on introducing new taxes. As set out in the 2024-25 Programme for Government, the Scottish Government intends to introduce legislation in 2025-26 to establish a Building Safety Levy in Scotland. This will be equivalent to a Levy that the UK Government intends to introduce in England. The Scottish Building Safety Levy will provide vital revenues to support the funding of the Scottish Government’s Cladding Remediation Programme.

The Scottish Government has intensive work underway to explore a potential Cruise Ship Levy, including the practicality, deliverability, and impacts of such a levy. Ministerial roundtables with industry, local authorities and interested parties have informed preparations for a public consultation which will launch in January 2025. This is an important milestone in continuing the Scottish Government’s work on such a levy. The Scottish Government will continue to engage with affected communities, local authorities and businesses as this work moves forward.

The Tax Strategy sets out our priorities for ensuring the tax system continues to deliver sustainable and growing tax revenue. These priorities include further devolution of tax powers, the balance of taxes across labour, income and wealth, and the use of tax as a lever to encourage positive behavioural change. We will set out our detailed programme of work on these future priorities, which will be developed in collaboration with stakeholders, alongside the MTFS in 2025.

In support of this work on future reform of the Scottish tax system, the Scottish Government is committed to considering options for a Carbon Land Tax, as part of exploring regulatory and fiscal changes that could be made to further support land reform and reduce greenhouse gas emissions from land. The Scottish Government will work with the Scottish Land Commission to consult with a range of stakeholders and to develop the evidence necessary to identify and assess options for future taxation in this area.

Footnotes

1 Scotland’s Economic and Fiscal Forecasts – December 2024

2 Scotland's Tax Strategy: Building on our Tax Principles

3 Scottish Budget 2025 to 2026: Public Attitudes to Tax

4 Scotland’s Economic and Fiscal Forecasts – December 2024