A potential £1 billion reduction in Scotland’s financial resources due to changes in UK tax policies could significantly impact public services, according to Finance Secretary Shona Robison. The SNP minister has not ruled out the possibility of increasing income tax to address any funding gaps, especially after Chancellor Rachel Reeves hinted at potential tax hikes across the rest of the UK.
Reeves emphasized that she would take whatever measures are necessary to safeguard public finances when the Autumn Budget is unveiled in three weeks. While changes to UK income tax rates would not directly affect Scottish taxpayers, an increase could lead to a corresponding reduction in the block grant provided by the Treasury to the Scottish government.
The Scottish government has utilized its devolved powers to establish a distinct income tax system separate from the rest of the UK. This means that the UK government can deduct funds from the block grant based on the amount it estimates it would have collected if tax-raising powers were not devolved to Holyrood.
Despite these concerns, First Minister John Swinney has consistently urged the UK government to raise income tax, arguing that this could reduce the need for budget cuts. Robison warned that Scotland must not be treated as an "afterthought" in the chancellor's Budget planning, stating that the current fiscal framework is not "fit for purpose."
The Fraser of Allander Institute, an independent economic research unit at the University of Strathclyde, estimates that a 2% increase in UK income tax could result in a £1 billion reduction in Scotland’s block grant over the next three financial years. Robison expressed disbelief that a UK Labour government would intentionally cut Scotland’s budget by such a significant amount, emphasizing that this would have a "massive impact" on the NHS and local government.
Robison clarified that her government does not want to raise tax rates to fill a funding shortfall but has not ruled out the option. She stated that the government will explore all available options to ensure fairness for taxpayers while maintaining essential public services. Additionally, she called for increased funding for public services and the removal of the two-child cap on benefits payments.
Earlier, when asked about the Scottish government's stance on UK income tax increases, the first minister’s spokesperson confirmed that there had been no change in position. The question of how Scotland's tax system differs from the rest of the UK remains a key point of discussion.
Following a pre-Budget speech at Downing Street, speculation persists that the chancellor might increase income taxes while reducing National Insurance contributions for workers. Although rises in National Insurance or VAT would directly affect people in Scotland, changes to UK income tax would not. Westminster sets the personal allowance, but the Scottish government can set its own bands and rates beyond that. SNP ministers have used these powers to create what they describe as a fairer, more progressive system.
Critics argue that Scotland's income tax regime, which includes seven bands compared to the UK's four, is more complex and penalizes medium and high earners. In Scotland, individuals earning below approximately £30,300 pay slightly less income tax than in other parts of the UK, with potential savings of up to £28. However, those earning above this threshold pay progressively more, with someone earning £50,000 paying £1,528 more than in the rest of the UK, and someone earning £125,000 paying £5,207 more.
A rise in UK income tax would trigger an automatic deduction from the block grant due to the block grant adjustment (BGA) mechanism. This is designed to compensate the UK government for lost revenue from transferring tax-raising powers to Holyrood. If the chancellor raises income tax in England, Wales, and Northern Ireland, the UK government would collect more in Scotland, leading to a larger BGA deduction from the Scottish government’s funds.
According to the Fraser of Allander Institute, a one percentage point increase in the basic UK rate would result in a £486 million deduction from the Scottish Budget in 2026-27. This figure would rise to £972 million if the basic rate increased by two percentage points, with more than £1 billion in cuts to the block grant over the following two years. A two percentage point increase in the UK higher rate would lead to a £225 million deduction in 2026-27, rising to around £300 million in the subsequent years.
Labour’s 2024 general election manifesto pledged not to increase income tax, VAT, or National Insurance. However, the chancellor cited factors such as inflation, trade tariffs, poor productivity, Brexit, and increased defense spending as reasons to consider tax hikes. She emphasized the need to protect families from high inflation and interest rates, ensure public services remain secure, and build a stable economy for future generations.
The Institute for Fiscal Studies has warned that Reeves will likely have to raise taxes to address an estimated £22 billion shortfall in government finances. The Office for Budget Responsibility is also expected to lower its productivity forecasts, potentially adding as much as £20 billion to the amount the chancellor needs to cover.
Scottish Labour leader Anas Sarwar acknowledged uncertainty about whether the chancellor would break her manifesto promise not to increase income tax in England, Wales, and Northern Ireland. He noted that the Scottish government is responsible for income tax in Scotland and highlighted that John Swinney has been advocating for tax increases in England and Wales.
Scottish Conservative finance spokesman Craig Hoy criticized the SNP for relying on tax hikes to address funding shortfalls, accusing them of imposing high taxes on hard-working Scots. Meanwhile, Scottish Greens co-leader Ross Greer urged Reeves to focus on taxing the extremely wealthy, stating that it was time for them to contribute their fair share.
When is the Scottish Budget?
The UK government Budget, scheduled for November 26, will be a month later than last year, affecting the timing of the Scottish Budget, which will be announced on January 15. MSPs will have a shorter period to scrutinize the budget before the end of the financial year in April. The Scottish Budget will also be announced ahead of the Holyrood election in May, with considerations for voters likely influencing the final decisions on tax and spending plans.
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