Scottish Tax: Rates, Rules, and Devolved Taxes

Scotland possesses the authority to establish its own rates for certain taxes. These powers are devolved from the UK Parliament and are managed by the Scottish Government, with Revenue Scotland overseeing their collection. This means that while many taxes remain aligned with the rest of the United Kingdom (UK), several are set independently in Scotland. For most individuals, the most noticeable distinction lies in the rates and bands for Income Tax.

The Scottish tax system operates as a hybrid model. While Scotland sets its own income tax bands for employment and pension income, the Personal Allowance—the amount of income one can earn before paying any tax—is still determined by the UK Government. His Majesty’s Revenue and Customs (HMRC) continues to be the primary body for the overall collection and management of these taxes, ensuring consistency in administration.

Determining Scottish Taxpayer Status

To be subject to Scottish Income Tax, an individual must be classified as a Scottish taxpayer by His Majesty’s Revenue and Customs (HMRC). The foundational requirement is that the individual must be a UK resident for tax purposes. An individual who is not a UK tax resident cannot be a Scottish taxpayer.

The primary test for determining status revolves around an individual’s home. If a person has only one home in the UK and it is located in Scotland, they are considered a Scottish taxpayer for the entire tax year, which runs from April 6th to April 5th.

The situation is more complex if an individual has more than one home in the UK, such as one in Scotland and another in England. In such cases, the determining factor is which of these is their “main place of residence.” This is not simply a matter of counting nights spent in each location, but which place has the strongest connection. HMRC considers factors such as where their family lives, where most personal possessions are kept, and where they are registered for services like banking or with a doctor.

If a main home cannot be identified, or if an individual has no home in the UK, a day-counting test is applied. An individual will be a Scottish taxpayer if they spend more days in Scotland than in any other single part of the UK. A “day” is counted if the individual is in that part of the UK at midnight.

Scottish Income Tax on Earnings

Once identified as a Scottish taxpayer, the distinct Scottish Income Tax rates and bands apply to their non-savings and non-dividend income. This category includes earnings from employment, profits from self-employment, and income from pensions. The Scottish Parliament has established a more graduated income tax system than the rest of the UK (rUK), featuring six distinct bands for the 2025-2026 tax year. These bands are applied after the UK-wide standard Personal Allowance of £12,570 is taken into account.

The 2025-2026 Scottish Income Tax rates and bands are:

• Starter Rate: 19% on income from £12,571 to £15,397
• Scottish Basic Rate: 20% on income from £15,398 to £27,491
• Intermediate Rate: 21% on income from £27,492 to £43,662
• Higher Rate: 42% on income from £43,663 to £75,000
• Advanced Rate: 45% on income from £75,001 to £125,140
• Top Rate: 48% on income above £125,140

This structure contrasts with the rUK system for 2025-2026, which has a Basic Rate of 20% on income from £12,571 to £50,270, a Higher Rate of 40% for income between £50,271 and £125,140, and an Additional Rate of 45% on income over £125,140. The different thresholds and rates mean that the amount of income tax paid can vary. For example, a person earning £50,000 in Scotland would pay more tax than someone with the same salary in England due to crossing into the 42% Higher Rate band sooner.

UK Tax on Savings and Dividends

Despite being subject to Scottish rates for their earnings, a Scottish taxpayer’s income from savings and dividends is taxed using UK-wide rates and bands. The tax rates applied to savings interest and dividend payments are the same as those for taxpayers in England, Wales, and Northern Ireland.

The UK government sets specific tax-free allowances for this income that apply to all UK residents. The Personal Savings Allowance (PSA) for 2025-2026 allows basic rate taxpayers to earn up to £1,000 in savings interest tax-free, while higher rate taxpayers have a £500 allowance. Additional rate taxpayers do not receive a PSA.

Similarly, the Dividend Allowance provides a tax-free amount for income received from dividends, set at £500 for the 2025-2026 tax year. Dividend income above this amount is subject to tax at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.

While the tax rates on savings and dividends are the UK-wide ones, a Scottish taxpayer’s total income, including their earnings taxed at Scottish rates, is used to determine which tax band they fall into. For example, if a Scottish taxpayer’s employment income places them in the higher rate band under the Scottish system, their savings interest above the PSA will be taxed at the UK higher rate of 40%.

Devolved Property and Local Taxes

Beyond income tax, the Scottish Parliament has authority over several other taxes, most notably those related to property. The Land and Buildings Transaction Tax (LBTT) is the Scottish equivalent of Stamp Duty Land Tax and is payable on the purchase of property in Scotland. The tax operates on a progressive basis, with different rates applied to different portions of the property price.

For residential properties, the 2025-2026 LBTT rates are:

• 0% on the portion up to £145,000
• 2% on the portion from £145,001 to £250,000
• 5% on the portion from £250,001 to £325,000
• 10% on the portion from £325,001 to £750,000
• 12% on any amount above £750,000

First-time buyers benefit from a relief that increases their zero-tax threshold to £175,000. Additionally, an Additional Dwelling Supplement (ADS) of 8% of the total purchase price is charged on the purchase of second homes or buy-to-let properties valued at £40,000 or more.

Council Tax is another local tax, and its implementation in Scotland is a devolved matter. Each residential property is placed into one of eight valuation bands, from A to H, based on its assessed value as of April 1, 1991. Local Scottish councils then set the annual tax rate for Band D properties, and the rates for all other bands are calculated as a fixed proportion of the Band D rate. This means the actual amount of Council Tax paid can vary significantly from one local authority to another, reflecting local spending decisions.

Tax Administration and Collection

The administration of Scottish Income Tax is handled by HMRC, which works to identify Scottish taxpayers and ensure the correct rates are applied. For individuals who are employed or receive a pension through the Pay As You Earn (PAYE) system, HMRC will issue a tax code to their employer or pension provider.

A Scottish taxpayer’s code begins with the letter ‘S’, which signals that the Scottish rates and bands should be used to calculate the income tax deducted. For an individual with a standard personal allowance, the tax code for 2025-2026 would be S1257L. The payslip an employee receives will reflect the tax deducted based on this ‘S’ code, but it does not show a separate breakdown of the Scottish and UK tax rates.

An individual cannot request their employer to change their tax code without official notification from HMRC. If an individual’s circumstances change, such as moving to or from Scotland, they must inform HMRC, who will then update their records and issue a new tax code if necessary.

For individuals required to file a Self Assessment tax return, the process involves confirming their taxpayer status. The online form includes a specific section where individuals must indicate if they are a Scottish taxpayer. Based on this declaration, HMRC’s system will automatically calculate the tax liability using the appropriate Scottish or rUK rates.