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The Scottish Budget – four thoughts on a tiny tax cut

The Scottish Budget – four thoughts on a tiny tax cut

By Dan Neidle

January 14, 2026

The Scottish Budget was on 13 January 2026.

The flagship policy is being widely reported as a cut in income tax¹ for low earners, by increasing thresholds from 2026/27. The 20% basic rate will now start at £16,538 instead of £15,398. The 21% intermediate rate will now start at £29,527 instead of £27,492.

This is a very peculiar tax cut. I have four quick thoughts, and an interactive tax calculator showing the effects:

A very small tax cut

The impact looks like this:

A taxpayer earning £15,398 or more receives a small tax cut – £6.02 at £16,000, rising to £11.40 at £16,538 (i.e. because that’s 1% of the difference between £16,538 and £15,398).
A taxpayer earning £27,492 or more receives an additional tax cut – £5.08 at £28,000, rising to £20.35 at £29,527 (1% of the difference between £29,527 and £27,492).
Everyone earning more than £29,527 gets the full benefit of both cuts, i.e. £31.75.

This may be a contender for the smallest income tax cut in history. The previous record holder was the Australian $4 per week tax cut of 2003, widely mocked as a “milk and sandwich” tax cut. The £212 “marriage allowance” introduced by the Cameron Government runs it a close second. The £31.75 cut beats both handily – it’s 61p per week. The amounts are so small that for some small businesses, the time/cost of recoding people’s taxes will be more than the tax they will save.

It’s not a tax cut

The benefit of the tax cut is undone by “fiscal creep” – the freezing of personal allowances and tax thresholds at a time of relatively high inflation (just over 3%). That pushes the low paid over the personal allowance, and others into higher tax brackets.²

This is a much bigger effect than the “tax cut”. If we just look at the personal allowance, to keep up with 3% inflation, the threshold should have risen from £12,570 to £12,947. It didn’t rise at all – and means that, in real terms, everyone earning £12,947+ is worse off by £72. The “tax cut” means there’s no fiscal creep in 2026/27 for the basic rate and intermediate rate band threshold, but there is for the other band thresholds.³

So in real terms nobody is receiving a tax cut. The real effect of the Scottish Budget is that the income tax increase from fiscal creep is slightly reduced.

Across the whole UK, fiscal creep amounts to a tax increase of £30bn/year. The cost of the Scottish tax cuts is £50m – it’s an irrelevance in fiscal terms.

The benefit goes to higher earners

This is being positioned as a “tax for low earners”, but most of the benefit goes to higher earners. Of the £50m overall cost of the tax cut, about two-thirds will go to the highest earning 50% of taxpayers. That’s because all of the top 50% receive the full £31.75 benefit, but many lower paid taxpayers receive nothing or only £11.40.⁴ We shouldn’t overstate this, because the amounts involved are so very small. But given the tax cut is symbolic, it’s fair to ask why the symbolism is so odd.

It’s – obviously – all about politics

Given these oddities, why bother to implement a tax cut at all?

The Scottish Government’s Tax Advisory Group (of which I am a member) had no involvement in the decision-making process. This was an entirely political measure.

It’s likely the purpose is to enable the Scottish Government to say that everyone earning the Scottish median income of £31,136 (or less) will pay less tax in Scotland than in the rest of the UK. That had always been their aim, but inflation/wage rises meant it ceased to be true in 2023/24 and probably 2024/25. So the very slight nudge to thresholds is intended to ensure that (at current projected median earnings) the median earner in Scotland pays about £24 less tax than someone on the same earnings elsewhere in the UK (and someone earning less than £29,527 about £40 less). This is, however, very dependent on median earnings. Higher than expected inflation/wage increases will reverse it, as happened in 2023/24.

The real difference is for higher incomes. Someone earning £50k pays £1.5k more tax; someone earning £100k pays £3,300 more. That means, overall, Scotland raises about £1bn of additional tax which (broadly speaking) funds additional social and education expenditure. That’s a perfectly valid political choice and, it seems, a popular one. But I’d prefer it was presented more frankly, without gimmicks like “tax cuts” that aren’t tax cuts at all.

The tax calculator

Our interactive tax calculator starts by showing the comparison between Scotland and the rest of the UK. You can also opt to see the change caused by the Scottish Budget, but it’s almost invisible on the chart.

You can view the calculator full screen here.

There’s a guide to how to use it in our Budget analysis here, which also discusses marginal tax rates: what they are, and why the UK marginal rates are so unfortunate.

Code

The code for the calculator is available here. If you want to experiment with different rates, you can download all the files and run “index.html” locally. You can then edit “UK_marginal_tax_datasets.json” and add different scenarios.

Footnotes

Note that this is for income tax on wages; income tax on savings/dividends remains at the UK rates and thresholds; a somewhat irrational quirk of devolution. ↩︎
Scotland has no power to change the personal allowance per se, but it could effectively increase the personal allowance by creating a small 0% rate (with additional changes at the top end to roughly mimic the £100k personal allowance clawback). This would broadly amount to the same thing in economic terms. ↩︎
Note that the IFS presents figures for the value of the tax cut in real terms; ours are in cash terms. ↩︎
A simple back-of-the-envelope calculation: HMRC data shows that, in 2022/23, 9% of Scottish taxpayers paid the starter rate. They save nothing from the tax cut. 38% paid the basic rate – most will save £11.40. Then 35% paid the intermediate rate – most will save £32. 18% paid the higher/top rate – all of them will save £31.75. So the weighted saving of the bottom 47% is c£9; the weighted saving of the top 53% is c£32. So about 78% of the benefit would be going to the top 53%, if earnings were the same as in 2022/23. Wages have of course risen significantly since then, pushing many taxpayers in the bottom 50% into higher bands – that’s bad news for them overall, but means they receive proportionately more of the benefit of the tax cut. Overall we estimate that around 60-65% of the benefit will end up going to the top 50%. ↩︎

9 responses to “The Scottish Budget – four thoughts on a tiny tax cut”

Andrew Carey

January 14, 2026 11:58 am

Does the Scottish Government have the power to keep the £12570 personal allowance for everyone regardless of income? It might have been Saez or Diamond who found that when marginal rates of income taxation go over 55% ish then income tax reduces as so many alter their behaviours, hours, pensions, retirement age to avoid it. Many skilled workers report just under £100k of taxable income.
If Scotland could reinstate it for everyone then it would reap the rewards as the high earners come back. The net tax take would rise.

Reply
Andrew Carey

January 14, 2026 11:43 am

Does the Scottish Government have the power to keep the £12570 personal allowance for everyone regardless of income? It might have been Saez or Diamond who found that when marginal rates of income taxation go over 55% ish then income tax reduces as so many alter their behaviours, hours, pensions, retirement age to avoid it. Many skilled workers report just under £100k of taxable income.
If Scotland could reinstate it for everyone then it would reap the rewards as the high earners come back and the net take would rise.

Reply
1. Andrew
  
  January 14, 2026 12:01 pm
  
  No, the powers devolved only allow them to set rates and bands for non-savings and non-dividend income. All other powers, including setting personal allowance are retained by Westminster.
  
  Which I think means that once the new rates of tax for property income apply in rUK from April 27 then (unless and until the power to set a devolved rate of property tax is granted and used) then rents will be taxed at a lower rate for individuals in Scotland than the rest of the UK.
  
  Reply
Dorothy

January 14, 2026 11:27 am

Of course under current constitutional arrangements in the UK, the Scottish Government has few of theses additional tax policy levers that you suggest.

Also the Scottish government has to balance its books every year. When was the last time the UK Government do so?

Reply
1. Dan Neidle
  
  January 14, 2026 11:59 am
  
  I don’t understand. What’s the lever I suggested that the Scottish Government doesn’t have?
  
  Reply
Tony Whelan

January 14, 2026 11:03 am

Hi Dan, your analysis of it being political is correct. Assuming you are not tapped. Into Scottish politics as much as me it’s been clear for a while that the ‘more people in Scotland pay less tax than the rUK’ had been eroded by fiscal drag and inflation, lack of wage growth etc. Fiscally this minor change might have little impact, however, the Scot Gov can now clearly say ‘55% of taxpayer in Scotland pay less tax than the rUK’. You can see this in the coverage by the largely Scotland hostile media by their lat hung onto the ‘mansion tax’. Scottish politics is wierd when the entire media is routinely tells us ‘Scotland is shite’!

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John C

January 14, 2026 10:03 am

Tinkering at the edges does no good for anyone. We need real change and a realisation that if tax rates don’t fall, it will stifle any chance of “growing the economy”.

From personal experience I know several people who have cut their hours or won’t do extra shifts or overtime because they are effectively pushed in to a 50% tax band (42% tax + 8% NI) which gives them less in their hand per hour on overtime, than they get for normal rate work taxed at basic rate tax. Tradesmen are also much quicker to ask for cash in hand jobs now, no doubt for the same reason. It is a very similar situation at £100,000 where the marginal rate in Scotland is 69.5%. Many people take avoiding action to stay out of this band at the expense of the economy as a whole because they cut hours, pay much larger pension contributions than they would otherwise and generally don’t contribute as much as they would/could, were tax rates considered to be reasonable.

Politicians need to consider how ordinary people react and change behaviour as a result of these cliff edge taxes and other anomalies.

Maybe we need a 30% tax band instead of the straight doubling of tax from 20% to 40%. Maybe we need a much much larger band for the loss of personal allowances e.g. between £100K and £200K. I know for certain that would reduce the pension contributions of many, leaving more money in their pockets to spend in other businesses and shops which would help to grow the economy.

The increase in the CGT rate for BADR from 6th April 2025 saw lots of people selling up and retiring so that they qualified for the 10% rate. This will no doubt bring a decent uplift in CGT for 2024/25 and the 14% rate for 2025/26 is still generous enough to make more people sell up this year but from what I am hearing, the 18% rate for 2026/27 is a step too far and business owners are going to stay put and try to find other ways of exiting. Tax policy does change taxpayer’s behaviour but not always as expected.

Reply
Andrew

January 14, 2026 9:35 am

Very minor quibble but is it true that introducing a nil rate band would have the same effect as increasing the personal allowance? Unlike a personal allowance, a nil rate band would not be clawed back and therefore would benefit higher earners. I don’t think the Scottish Government can implement a rate/band that can be clawed back?

Whole thing shows what happens when tax policy is subservient to political narratives. Unfortunately this hardly unique in that respect.

Reply
1. Dan Neidle
  
  January 14, 2026 10:22 am
  
  that’s fair. You’d have to meddle with the thresholds at the top end to undo the benefit. I’ll add a footnote to the footnote!
  
  Reply