By Euan Fernie, Edinburgh-based Partner, MHA, accountancy and business advisory firm
Whilst income tax rates have continued to diverge in Scotland in recent years, this mainly applies to earned and rental income.
Savings and dividend income remain taxed at UK rates, so the 2% increase proposed in Budget 2025 will directly affect Scottish taxpayers in these areas.
The changes apply to all tax rates for rental and interest income, and to the basic and upper rates for dividends, though the additional dividend rate of 39.35% remains unchanged.
Freezing income tax thresholds has been a feature of previous Budgets as a way to increase the overall tax take without raising headline rates. However, whatever the political presentation, more tax payable is still an increase for many families.
The changes to APR and BPR for inheritance tax, introducing a £1m allowance at 100% relief from April 2026, and allowing this to be transferred between spouses, will be welcomed. This provides couples with up to £2m of relief, aligning these rules with the existing transferable Nil Rate Band and Residence Nil Rate Band. The previous “use it or lose it” approach risked creating unnecessary transfers simply to secure relief.
The revision to the tax exemption for shareholders selling to an Employee Ownership Trust, effective from November 2025, may slow activity in this area. A 100% exemption was a significant incentive; a 50% exemption may still appeal, but owners will now need to weigh the tax benefit against the deferred nature of sale proceeds.
We now await January’s Scottish Budget to understand any further changes to income tax rates or thresholds north of the border.
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While a number of smaller changes and technical adjustments will emerge, many of the larger forecasted interventions did not materialise. For example:
- No changes to tax-free pension lump sums
- No restrictions to the annual pension allowance
- No changes to tax relief on pension contributions
- No further amendments to IHT reliefs
- Income tax changes limited to income from assets (property, investments and cash) and at a smaller scale than anticipated
In the coming months, individuals and business owners will need to assess how these measures affect their position – and, as always, the devil will be in the detail.
