Scottish Budget 2025-26: Navigating the challenges

Following the UK Budget on 30 October, Scotland’s Finance Secretary Shona Robison opened her statement by noting that, although additional funding for Scotland through the Barnett formula was to be welcomed, decisions taken by the new Labour government in Westminster created challenges for her.

Most notably she highlighted the increase in employer National Insurance contributions on the Scottish public sector pay bill, which would not be fully funded in 2025/26 by the extra money from London. Although, as pointed out by the Fraser of Allander Institute, recent pay settlements here were already in excess of what had been budgeted this time last year. Over the next three years, Robison estimated that Public Sector pay policy would result in an overall increase equivalent to 9% above inflation.

That aside, record funding was promised to the NHS to reduce ever-increasing waiting times; a total of £21bn of funding in 2025/26, to include the uplift of an additional £2bn for health and social care, focusing on GP waiting times and reducing hospital waiting lists; the pledge being that no one in Scotland should have more than a 12-month wait for an outpatient appointment by the end of the current parliament.

There would also be extra money for local government, with £15bn going to the various local authorities. With the council tax freeze no longer in place, Robison indicated “there is no reason for big increases in council tax”, although some authorities have already flagged increases of up to 15%.

Extra spending was also announced for the police and crime prevention, with a focus on crime against retail businesses, and two capital spending projects to replace HMP Barlinnie and HMP Inverness. Alongside this, infrastructure spending of £1.1bn for the railways and £1bn to continue the upgrades and maintenance of trunk roads (including the ongoing dualling of the A9).

Alongside the pre-announcement of the reinstatement of winter fuel payments for pensioners, one surprise was the intention to remove the two-child benefit cap from 2026. Both measures were announced with pointed criticism of the new Labour administration, and part of a package in this SNP Budget to focus on reducing child poverty, alongside extra funding for school breakfast clubs across the country, and £120m going direct to school headteachers to help them address the poverty attainment gap.

Knowing that a minority SNP government will need other party support to pass the Budget, there were repeated pleas from Robison for Parliament to back her Budget for this extra funding to flow. So, no mention at all of funding for independence preparation (the Lib Dems were listening closely on this point), but plenty of funding streams proposed for woodland and peatland conservation (around £90m) and up to £7bn capital spending to develop offshore windfarm infrastructure, including a new North East hub (perhaps the Green party might provide the necessary votes, as it did last year?).

On the income side of the equation, Scotland will follow suit with the rest of the UK by increasing Stamp Duty Land Tax for additional properties, with a rise in the Additional Dwelling Supplement (ADS) to 8%, with immediate effect.

There was much anticipation around more changes on income tax. As I called after the UK Budget (and in a further attempt to distinguish the SNP from Labour), there was some proposed modest expansion of the basic and intermediate rate tax bands of around 3.5%, but otherwise no increases or changes in the higher rate income tax levels, or above. On this point, Robison thanked those taxpayers with the broadest shoulders, allowing her to support lower and medium earners. Scottish business owners have been calling for a bolder move on income tax, at higher levels in particular, to provide support in attracting and retaining the best talent in Scotland to help drive stuttering growth across a range of sectors.

Overall, there was very little in this speech to close the tax gap with the rest of the UK. According to estimates from the Scottish Fiscal Commission, anyone earning over £30,300p.a. in Scotland will still pay more income tax, and the staggered Scottish tax bands means take-home pay for someone earning £50,000p.a. (think train drivers/police/senior nurses), is around £1,500p.a. lower. At £100,000p.a., this gap increases to over £3,300 per year, which is not insignificant. Promises of improved public services alongside reductions in waste will need to follow over the rest of the parliament, to improve the SNP’s potential Holyrood outcome in 2026 against a resurgent Labour party.

The race to the next Scottish parliamentary elections isfirmly on – potentially just over 15 months away if this Budget gets passed in the New Year. If it doesn’t, Scots may be going to the polls before Easter. The SNP will not want that, so we may see some amendments to yesterday’s announcements to garner the cross-party support needed for the extra votes.

In the meantime, there were enough announcements in the October UK Budget to cause investors and business owners to reassess their plans and finances. Nothing in this speech from Holyrood changes that, so do reach out to your professional advisers to help navigate that raft of changes, and keep close to them as things develop into 2025.