Set to be the last budget before the Holyrood elections in May, the Scottish National Party (SNP) has set out how the administration intends to spend around £68bn earlier this week.
In this straight-talking blog, we’re here to update our Scottish client base on what’s important and what changes are afoot.
Income tax changes in Scotland
For 2026/27, the Scottish Government has proposed increasing the Starter and Basic rate thresholds, while freezing all remaining income tax thresholds.
Proposed income tax bands 2026/27:
- Personal allowance: First £12,570 – 0%
- Starter rate: £12,571 – £16,537 – 19%
- Scottish Basic rate: £16,538 – £29,526 – 20%
- Intermediate rate: £29,527 – £43,662 – 21%
- Higher rate: £43,663 – £75,000 – 42%
- Advanced rate: £75,001 – £125,140 – 45%
- Top rate: Over £125,140 – 48%
(Personal allowance reduces by £1 for every £2 earned between £100,000 and £125,140.)
Impact: The modest uplift to the starter and basic thresholds will provide some relief for lower earners. However, freezing the higher bands continues the trend of fiscal drag – meaning individuals receiving pay rises may be pulled into higher tax brackets over time. This is particularly relevant for middle to higher earners and business owners extracting profits via salary. Regular remuneration reviews will remain key to managing overall tax exposure.
Company contractor errors
HMRC has shared with professional bodies a list of common Construction Industry Scheme (CIS) errors identified during enquiries. These include:
- Incorrectly treating individuals as self-employed rather than employees
- Failing to operate CIS where construction activities are in scope
- Not verifying subcontractors with HMRC before first payment
- Failing to reverify subcontractors after periods of inactivity or structural change
- Errors under the gross payment arrangement
- Inadequate checks on materials costs before excluding them from CIS deductions
Impact: Errors under CIS can result in contractors becoming liable for unpaid tax, plus interest and penalties. HMRC’s message is clear: “If in doubt, operate CIS.” Contractors should ensure systems, processes and controls are robust and regularly reviewed.
Increased HMRC scrutiny on company pooled cars
Recent HMRC statistics show PAYE audit yield increased by 19% in 2023/24, with alleged pooled cars being a key challenge.
A vehicle only qualifies as a pooled car if all conditions are met, including:
- It is used by more than one employee
- It is not used exclusively by one individual
- Any private use is merely incidental
- It is not normally kept overnight at an employee’s home
- Detailed mileage records are maintained
Impact: HMRC is actively challenging weak or unsupported pooled car claims. Employers should review company car arrangements carefully and ensure records are watertight. Misclassification can result in unexpected tax bills, interest and penalties.
Business rates
The Small Business Bonus Scheme will be maintained at existing rates and thresholds for the next three years of the Business Rates Revaluation Cycle.
Sector-specific relief
In addition, a 15% relief will apply in 2026/27 (and for the full three-year BRRC) to retail, hospitality, and leisure properties with a rateable value up to £100,000. This relief is capped at £110,000 per business per year.
Impact: This is welcome news for sectors still feeling pressure from rising costs and changing consumer behaviour. Eligible businesses should ensure reliefs are correctly applied and reflected in cashflow forecasts.
New council tax bands for high-value homes
Two new high-value Council Tax bands will be introduced from 1 April 2028:
- Band I: Properties valued between £1 million and £2 million
- Band J: Properties valued over £2 million
Impact: While this will only affect a small proportion of households, it represents a further shift towards progressive property taxation in Scotland and may influence future planning decisions for owners of high-value residential property.
Scottish Air Departure Tax (ADT)
Scottish Air Departure Tax will become operational from 1 April 2027, with a Highlands and Islands exemption following consultation.
Impact: Businesses with frequent air travel requirements should monitor developments closely, particularly where travel costs are high.
Land and Buildings Transaction Tax (LBTT)
- LBTT rates and bands will remain unchanged
- Relief for first-time buyers will also continue, increasing the residential nil rate band from £145,000 to £175,000
Impact: Stability here will be welcome news for the Scottish residential property market. First-time buyers continue to benefit from a reduction in upfront costs – supporting activity at the lower end of the market.
Scottish Landfill and Aggregates Tax
From 1 April 2026, both Scottish Landfill Tax (SLfT) rates will increase to align with UK Landfill Tax rates:
- Standard rate: £130.75 per tonne
- Lower rate: £8.65 per tonne
Impact: Businesses operating in construction, waste management and infrastructure should expect increased costs, which may need to be factored into pricing, margins and longer-term contracts.
If you are based in Scotland and would like to discuss any of the budget announcements in more detail, please don’t hesitate to contact us – we’d be happy to help.
