The Scottish Budget for 2025/26 was presented to the Scottish Parliament on 4 December 2024.1 ÌýThis report summarises key employment tax compliance considerations for global organisations with employees based in Scotland.
WHY THIS MATTERS
The U.K. tax authorities (HMRC) will notify employers of the ‘Scottish taxpayerâ€� status of their employees for most payroll withholding purposes.Ìý However, employers that operate Appendix 6 modified payroll agreements in respect of tax-equalised expatriates must determine whether individuals included in a modified payroll scheme are Scottish taxpayers based on the applicable statutory tests, relevant facts, and HMRC’s published guidance on Scottish taxpayer status.2
Employers will also need to take account of Scottish rates of income tax when calculating the tax due under a ‘pay as you earn� (PAYE) Settlement Agreement to pay income tax on employees� behalf on minor or irregular benefits.
International assignment cost projections and budgeting should reflect the rates and bands noted in this newsletter when they take effect.Ìý
Scottish Budget 2025/26
Income Tax Announcements
There are no changes to the Starter (19%), Basic (20%), Intermediate (21%), Higher (42%), Advanced (45%) and Top (48%) rates of income tax that apply to the relevant income of Scottish taxpayers for 2025/26.3
From 6 April 2025, the Basic and Intermediate thresholds (i.e., the income levels at which those rates come into effect) will each increase by 3.5 percent, which will result in more of Scottish taxpayersâ€� relevant income being taxed at the lower Starter and Basic rates. ÌýThe Higher, Advanced, and Top rate thresholds will remain unchanged.4
The Scottish government intends that for the remainder of the current Parliament (the next Scottish general election must be held by May 2026 at the latest):5
- the Starter and Basic rate bands will increase by at least the rate of inflation;
- no new Scottish income tax bands will be introduced; and
- there will be no increases to the current Scottish rates of income tax.
Rates and Bands
The tax rates and bands that apply to relevant income of Scottish taxpayers from 6 April 2025 are shown below. ÌýThese assume that the taxpayer receives the standard U.K. income-tax-free Personal Allowance for 2025/26 (which reduces by £1 for every £2 of adjusted net income over £100,000).
Band | Relevant income | Tax Rate |
Personal Allowance | Up to £12,570 | 0% |
Starter | Above £12,570 to £15,397 | 19% |
Basic | Above £15,397 to £27,491 | 20% |
Intermediate | Above £27,491 to £43,662 | 21% |
Higher | Above £43,662 to £75,000 | 42% |
Advanced* | Above £75,000 to £125,140 | 45% |
Top | Above £125,140 | 48% |
Source: ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø LLP (U.K.)
* The personal allowance reduces by £1 for every £2 of taxable income above £100,000.
Ìý
How Scottish Income Tax System Works
Devolved Income-Tax-Setting Powers
Income tax is partially devolved in the U.K., with certain powers exercised by the Scottish Parliament in
relation to Scottish taxpayers (see below), and all other income-tax powers exercised by the U.K. Parliament in relation to all U.K.-resident individuals.6
Scottish taxpayers are entitled to an income-tax-free Personal Allowance set by the U.K. Parliament (subject to their personal circumstances), and are subject to tax on savings income (i.e., interest) and dividends based on the same bands and rates as other individual U.K. taxpayers.
However, Scottish taxpayers are subject to income tax on non-savings and non-dividend income (e.g., employment income) based on rates and bands set by the Scottish Parliament.ÌýÌý
ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø INSIGHTS
As the Scottish government is a minority administration, individual measures are, potentially, subject to amendment during the Budget process as support from opposition parties is necessary for the Budget to pass.
Scottish Taxpayer Status � ‘Close Connection� and ‘Day Counting� Tests
In summary, an individual will be a ‘Scottish taxpayerâ€� for a particular U.K. tax year if he or she is U.K. tax resident and has a ‘close connectionâ€� with Scotland based on the location of his or her U.K. place of residence.Ìý U.K.-source income received by non-U.K. tax residents will be subject to U.K. income tax based on the main U.K. rates and bands, regardless of whether or not that income might be regarded as originating in Scotland.
An individual who cannot establish a ‘close connection� with any part of the U.K. (i.e., England, Northern Ireland, Scotland, or Wales) based on his or her place of residence, will be a Scottish taxpayer if he or she spends more days in Scotland than in each of England, Northern Ireland, and Wales individually.
It might therefore be necessary to count days spent in Scotland during a U.K. tax year to establish whether an individual is a Scottish taxpayer.
ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø INSIGHTS
Employers should make sure they can correctly identify Scottish taxpayers amongst their international assignee and cross-border employee population (including implementing arrangements to record days spent in Scotland and each other part of the U.K.).
Footnotes:
1Ìý See Scottish government, Publication - Corporate report: "."
2 See the HMRC internal manual Scottish Taxpayer Technical Guidance by clickingÌý.
3 ÌýFor more details, see the Scottish government Web page ‘Scottish Income Tax 2025 to 2026: factsheetâ€� by clicking .
4 ÌýFor more details, see the Scottish government Web page ‘Scottish Income Tax 2025 to 2026: factsheetâ€� by clicking .
5Ìý See the Scottish government (December 2024), Scotland’s Tax Strategy: Building on our Tax Principles, page 20, by clicking .
6Ìý For a comparison with the main U.K. income tax bands and rates see the GMS Flash Alert report on the Autumn Budget 2024 from ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø LLP in the U.K. by clicking here.
Contacts
More information
Disclaimer
The information contained in this newsletter was submitted by the ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø International member firm in the United Kingdom.
GMS Flash AlertÌýis a Global Mobility Services publication of the ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø LLP Washington National Tax practice. The ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø name and logo are trademarks used under license by the independent member firms of the ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø global organization. ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø International or any other member firm vis-à -vis third parties, nor does ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2024 ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø LLP a U.K. limited liability partnership and a member firm of the ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø global organisation of independent member firms affiliated with ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø International Limited, a private English company limited by guarantee. All rights reserved.Ìý