Budget Overview for both the UK and Scotland
Chancellor Rachel Reeves’ second Labour Budget was delivered in late November 2025 amid lots of speculation as to possible tax changes and given the backdrop of the significant changes made in the previous year.
To some surprise, the UK Government chose not to introduce any major tax changes, relying heavily on frozen thresholds, targeted reforms, and sector‑specific adjustments to increase revenue and influence behaviour. Nevertheless, the changes announced still raise a lot of additional tax revenue (expected to be over £26bn for the fiscal year 2030/31 alone).
The main changes announced in the Scottish Budget were to some of the starter and basic rate Income Tax thresholds, Tax thresholds, while maintaining the higher rate threshold.
UK Budget 2025 – Summary
On the positive side, the Inheritance Tax Agricultural and Business Relief allowances were made transferrable. And just before Christmas, it was announced the allowance for full relief would be increased to £2.5m from 6 April 2026. This is very welcome news and alone this could save £300,000 each for those with farming and business assets. Together, a married couple may now benefit from £5m of full relief, with relief limited to 50% thereafter. There were no changes made regarding unused pension pots, which will become liable to Inheritance Tax from April 2027.
The other major announcement was the introduction of two new Council Tax bands which will introduce the “Mansion Tax” to England. This applies to properties valued at over £2m. This commences in the 2028/29 tax year (i.e. April 2028). The charge will range from £2,500 to £7,500, depending on the value of the property. This is a devolved matter, and a similar charge will apply in Scotland (see below).
PERSONAL
Income Tax Rates and Bands
For UK taxpayers, the rates of Income Tax remain at 20%, 40%, and 45%. The personal allowance stays at £12,570, the higher‑rate threshold at £50,270, and the additional‑rate threshold at £125,140. These thresholds will remain frozen until at least 2030/31.
Dividend, Property, and Savings Income
There were changes announced to the taxation of dividend, property and savings income. The Income Tax rate is to increase by 2% for most tax bands, which are noted below:
Dividend income (from April 2026):
• Basic rate rises to 10.75%
• Higher rate rises to 35.75%
• Additional rate remains at 39.35%
Property and savings income (from April 2027):
• All rates increase by 2 percentage points, becoming 22%, 42%, and 47%.
In addition, a structural change is being made which means that reliefs must first be applied to employment or trading income before being offset against dividends, savings, or property income. This will reduce the tax efficiency of rental and investment income for many individuals. This applies from April 2027.
Tax Reliefs
Whilst there has been a lot of changes announced in the last two Budgets, many tax reliefs have remained unaltered, or had only modest changes. These reliefs include those for when gifts of qualifying assets are made, or when buying replacement business assets. The spouse exemption for Inheritance Tax is still unlimited, and assets in an estate are rebased to market value for Capital Gains Tax (in effect, washing out historic gains). These reliefs have never been more important.
From 6 April 2026, the rate of Capital Gains Tax (CGT) for assets qualifying for Business Asset Disposal Relief will increase to 18% (from 14% in 2025/26). The rate of Income Tax relief for Venture Capital Trust (VCT) investments will fall from 30% to 20% from the same date.
Employee Ownership Trusts (EOTs) saw a major shift from November 2025: only 50% of gains on qualifying disposals will be exempt from CGT, with the remainder deferred until the trustees dispose of the shares.
For Inheritance Tax, the nil rate band (£325,000) and residence nil rate band (maximum of £175,000) will remain frozen until 2031.
BUSINESS
The rate of Corporation Tax remains unchanged at 25% for profits above £250,000 and 19% for small profits. Late filing penalties will double from April 2026.
Capital Allowances remain supportive, with a new 40% first year allowance from January 2026. However, the main writing down allowance will fall from 18% to 14%. This alone will raise over £1bn in the 2026/27 tax year.
From April 2029 all VAT invoices must be electronic.
NIC thresholds for employees, the self employed, and employers will remain frozen from 2028 to 2031. From April 2029, salary sacrifice pension contributions above £2,000 per year will attract both employer and employee NICs.
A new Electric Vehicle Excise Duty (EVED) will apply from April 2028, charging electric and hybrid vehicles per mile driven.
Scottish Budget 2026/27
Shona Robison’s final Scottish Budget adjusted the starter and basic rate bands, increasing these by 7.4%. The other Income Tax thresholds remain unchanged. No changes were made to the rates of Income Tax.
There were no changes announced with regard to Land and Buildings Transaction Tax (LBTT), however, the operation of LBTT is currently under review and it is possible that changes will be announced in the not too distant future.
As for England and Wales, two new Council Tax bands will be introduced from April 2028.
This will apply to properties values at more than £1 million.
Scotland vs England – A Taxpayer Comparison
Following the Scottish Budget on 13 January 2026, we updated an article that we wrote a few years ago comparing the amount of Income Tax and National Insurance Contributions (NICs) that an employee resident in Scotland would pay compared to the rest of the UK. That article provides some illuminating reading, which you can find here.
