Introduction
In recent weeks there has been speculation about what, if any, tax rises the UK Chancellor might make in the Autumn Budget. Decisions on reserved taxes such as corporation tax or capital gains tax would impact Scottish taxpayers, but have no direct impact on the Scottish Budget. However, decisions around devolved or partially devolved taxes could have a direct impact on the Scottish budget, as well as Scottish taxpayers. Whilst not widely anticipated, any changes to UK government spending priorities could also affect the Scottish Budget through the Barnett formula.
This blog will set out some of the ways that decisions in the UK Budget can impact the upcoming Scottish Budget and Spending Review. The UK Budget will be presented on Wednesday 26 November, and the Scottish Budget on Tuesday 13 January.
Income tax
Income tax is partially devolved in Scotland. The Scottish Government can set income tax rates and bands on non-savings non-dividend (NSND) income, which accounts for over 90% of all income in Scotland. It can’t adjust the personal allowance above which income tax becomes payable (currently £12,570 per year).
NSND income tax is paid on various sources of income, most notably income from employment, self-employment, most pensions (including the state pension), rental income and some state benefits.
The logic of income tax devolution is that the Scottish Government keeps any revenue raised through income tax over and above what would have been raised had income tax not been devolved (and vice versa if revenues fall).
The way this works mechanically is through an adjustment to the Scottish budget called the Block Grant Adjustment (BGA). Put simply, the amount of revenue raised through NSND income tax in Scotland is added to the Scottish budget. Then, a proxy for the amount that the UK government would have raised had income tax not been devolved is deducted from the Scottish budget. This proxy is the BGA.
This means that the relative policy of the UK and Scottish governments matters. Take the example of the UK government increasing income tax rates. If devolution had never happened, the tax rise would have applied in Scotland and the UK government would have raised more revenue.
Under devolution, the UK government no longer receives any additional Scottish revenues had the tax rise applied in Scotland, so the BGA would increase to compensate the Treasury for this ‘loss’ of revenues. This in turn implies a smaller Scottish budget than would otherwise have been the case.
The same logic would apply if the UK government froze tax thresholds relative to Scottish thresholds. Income tax receipts go up in England, so the BGA increases to reflect this, and the Scottish budget reduces relative to what it would otherwise have been.
All of this, of course, assumes that the Scottish Government doesn’t respond by also increasing tax rates or freezing thresholds to either partially or fully offset the reduction in its budget.
An obvious question is how much would be deducted from the Scottish budget if the UK government increased income tax? This depends on various forecasts and estimates, so it is not possible to give a precise figure. The Fraser of Allander Institute has estimated the impact on the Scottish budget from hypothetical UK Government income tax increases, as set out in Table 1.
Table 1: Estimated effects of UK government income tax measures on the Scottish budget (£ million)
Measure | 2026-27 | 2027-28 | 2028-29 |
UK basic rate increased by 1p | -486 | -580 | -575 |
UK basic rate increased by 2p | -972 | -1,160 | -1,150 |
UK higher rate increased by 1p | -113 | -151 | -147 |
UK higher rate increased by 2p | -225 | -302 | -295 |
Source: HMRC, OBR, Fraser of Allander Institute calculations
For context, Scottish NSND income tax revenues in 2025-26 were forecast to be £20.50 billion and the BGA to be deducted was forecasted as £19.88 billion (according to the 2025 Fiscal Framework Outturn Report). This means the net amount added to the Scottish budget from NSND income tax was forecast to be £0.62 billion.
It’s worth noting here that this only discusses the impact on the tax and revenue raising side of the budget. If the UK government increased income tax and spent some or all of the additional revenue on devolved areas, such as health, the Scottish budget would benefit from related Barnett consequentials – roughly a population share of the increased spending in devolved areas depending on the specific area of spending.
National insurance
National insurance contributions are due on income from employment or profits from self-employment. They are paid by employees, employers and the self-employed.
The tax is reserved, meaning that any policy changes by the UK government apply to taxpayers in Scotland. It also means that any change in national insurance rates have no direct effect on the Scottish budget. As with additional UK government income tax revenues, if any additional national insurance contribution revenues are spent on devolved policy areas by the UK government, there would be an indirect impact on the Scottish budget via Barnett consequentials.
Another indirect effect could be from changes to employer national insurance rates, as happened in 2025-26. In this case, the rate employers pay on the salaries of employees was increased. As the devolved public sector in Scotland employs lots of people, it had to meet the cost of the higher national insurance rates out of the devolved budget. The UK government provided some compensation to the Scottish Government for the effect of this in 2025-26, although the Scottish Government argued that this did not meet the full costs to the Scottish public sector.
Other devolved taxes
In addition to income tax, there are currently two further devolved taxes which are subject to block grant adjustments, and a separate block grant adjustment related to social security.
Land and Building Transaction Tax (LBTT) is the tax applied to purchases of residential and non-residential land and buildings, as well as commercial leases. The Additional Dwelling Supplement is a supplement to LBTT which is only payable on residential transactions where the acquiring party owns more than once residence once the transaction is complete. The UK government’s equivalent of LBTT is Stamp Duty Land Tax (SDLT), so changes to SDLT do not apply in Scotland. But, as with income tax, if the UK government increases revenues from SDLT, the equivalent BGA will increase, thereby reducing the Scottish budget from what it would otherwise have been. The Scottish Government must then decide whether it wants to make adjustments to LBTT to offset the reduction.
Scottish Landfill Tax (SLfT) applies to the disposal of waste to landfill, charged by weight on the basis of two rates: a standard rate; and a lower rate for less polluting materials. The tax is intended to provide a financial incentive to support a more circular economy, reduce overall waste and the amount going to landfill, and increase recycling. Recent changes to this tax have been fairly limited in scale – the UK government has typically increased the rates in line with inflation, and the Scottish Government has chosen to match these changes in order to prevent any incentives to send landfill waste across the border.
In addition to these taxes, some elements of social security spending are devolved and the Scottish budget benefits from a positive BGA to reflect the amount that is no longer being spent by the UK government in Scotland. This has given the Scottish Government more powers to shape Scotland’s social security system, but also more budgetary risk. Any expenditure by the Scottish Government above the BGA must be funded from within the Scottish Budget. The BGA broadly reflects the hypothetical amount that would have been spent on equivalent social security payments had they not been devolved.
For context, the chart below shows the size of the block grant adjustments related to the three devolved taxes, and the BGA for social security, based on the 2025 Fiscal Framework Outturn Report.
As shown in the chart above, the vast majority of BGAs related to devolved taxes are due to income tax – so UK Government decisions on income tax have the potential to have the largest impact on the Scottish Budget. While there has been some speculation in the media around potential changes to SDLT, any such changes would not have as large an impact on the Scottish Budget as the potential income tax changes.
Social security
Social security spending in the UK has been growing, which means that the size of the BGA for social security has also grown. Throughout 2025 there has been considerable speculation around changes to social security policy in the rest of the UK.
The UK government had proposed restrictions on the eligibility for Personal Independence Payments (PIP) as part of the Welfare Reform Bill, but these proposals have since been withdrawn. In its Fiscal Update (August 2025), the Scottish Fiscal Commission (SFC) discussed the potential impact of changes to PIP eligibility, noting that:
“Previously planned measures to restrict eligibility for Personal Independence Payment (PIP) were removed from the bill passed by the House of Commons on 9 July. The latest social security Block Grant Adjustment forecasts were based on these policies being introduced. This was estimated to reduce the Scottish Government’s funding by £0.4 billion by 2029-30. That reduction will likely be reversed when the Office for Budget Responsibility (OBR) produces its next forecasts in the autumn, therefore increasing funding the Scottish Government receives for social security. However, any further UK Government policy changes, including further changes to disability payments, will affect the Scottish Government’s funding.”
The Scottish Government has also stated its intention to mitigate the two-child cap in Scotland. If this is not matched by similar action in the UK, this would come with an increased cost to the Scottish Budget. The SFC estimates that this additional cost would be £156 million in 2026-27. There has since been some speculation that the UK government will end the two-child limit. Any such policy would be expected to at least reduce the need for additional spending by the Scottish Government.
Spending decisions
Given the constrained fiscal context for the upcoming UK Budget, it appears unlikely that there will be many new, significant spending announcements. However, if the UK Government does announce shifts in spending in areas which are devolved, this will have an impact on the Scottish budget through the Barnett formula.
There are broadly speaking three different scenarios that can occur.
- The UK Government could increase spending overall in devolved areas, either by reducing spending in non-devolved areas, through additional borrowing, or through utilising any available fiscal headroom. If the increase in spending is greater than expected through the UK Spending Review earlier this year, then the Scottish Budget will be larger.
- The UK Government could prioritise spending in non-devolved areas, which happened to an extent in the recent UK Spending Review where defence was a clear priority. Should this happen, and if spending in devolved areas is reduced to compensate, then the Scottish Budget may be smaller than had been expected.
- The third scenario is that spending shifts around but that the net impact is zero. This is pretty unlikely, but is in theory a possibility as positive Barnetts could be offset by negative Barnetts. Each policy area has a comparability percentage which is used to calculate Barnett consequentials and these vary depending on the extent to which the policy is devolved. So for example, education has a comparability percentage of 100%, but transport is 95.6%, and HM Revenue and Customs is just 4.6%. Watch this short animation for an explainer on how the Barnett formula operates.
Depending on the decisions made by the UK government next week, the Scottish Government may find that the fiscal context for the upcoming Scottish Budget and Spending Review is different than anticipated. Keep an eye out for further SPICe blogs following the UK budget and in the run up to the Scottish budget in January. You can also find further SPICe blogs and budget tools and animations on our webpages.
Andrew Feeney-Seale and Rob Watts, Senior Researchers, Financial Scrutiny Unit