Introduction
On 26 November the UK Chancellor delivered her Budget, bringing to a close what has felt like a long period of speculation since the summer. The wait was not quite as long as anticipated however, as the Office for Budget Responsibility (OBR) accidently published their Economic and Fiscal Forecast a few hours early, revealing many of the headline decisions taken in the Budget.
The OBR forecast that decisions taken in the UK Budget would increase the ‘fiscal headroom’ to £22 billion (this is the gap that the UK Chancellor has between her spending commitments and meeting her fiscal rules on debt and borrowing). The OBR suggest that this increases the probability of meeting the Chancellor’s fiscal rule for a current budget surplus from 54 per cent in March to 59 per cent.
The forecast for economic growth has been revised up from 1 per cent in March 2025 to 1.5 per cent for 2025. However, growth rates for the later years have reduced slightly compared to the last forecast in March. Expectations for inflation have also been revised up from 3.3 per cent to 3.5 per cent for 2025, and from 2.1 per cent to 2.5 per cent for 2026. Unemployment is expected to remain at about 5 per cent until 2027, before falling back towards 4 per cent (which the OBR describe as the ‘estimated equilibrium rate’).
The OBR also forecast that debt will rise as a share of GDP to 96 per cent by the end of the decade, which is two percentage points higher than was forecast in March. The market reaction has been mostly positive, with the Financial Times noting that UK gilts regained the ground they had lost since the U-turn on raising income tax was leaked.
As expected, the OBR revised down is projections for the underlying rate of productivity growth over the medium term, as its previous assumptions had been too optimistic. This in turn means lower forecasted tax receipts, as productivity growth is linked to wage growth. However, this was partly offset by higher-than-expected nominal wage growth.
As has been the case ahead of most recent fiscal events, many of the headline proposals were trailed in the media ahead of the publication. What is perhaps notable this time is the volume of different and contrary policy positions which have been leaked in this way, perhaps reflecting the challenge the UK Chancellor faces in calming financial markets, supporting growth, complying with the ‘fiscal rules’ and delivering on manifesto commitments.
Before the Chancellor rose to deliver the Budget, the Deputy Speaker took issue with the volume of briefing in the media ahead of the statement, noting that this trend had been increasing under successive governments, stating that:
“The premature disclosure of the contents of the Budget has always been regarded as a supreme discourtesy to this House and to all the democratically elected Members, not to mention to Mr Speaker, and to me, the Chairman of Ways and Means.”
What spending measures were announced in the Budget?
While the constrained fiscal outlook was always likely to restrict new spending, the Budget nonetheless includes £6.6 billion in new spending commitments for 2026-27, which rise to £11.3 billion by 2029-30.
Welfare policy costs are set to increase by £4.7 billion in 2026-27, including the already announced reversal of cuts to winter fuel payment, reversal of the tightening of qualifying criteria for the daily living component of personal independence payments, and increases to the value of the universal health element.
One of the more high profile spending decisions is the removal of the two-child limit from April 2026, which is expected to cost £2.3 billion in 2026-27. The UK government estimates that this will reduce child poverty by 450,000 by 2029-30.
The UK government has also announced that it will temporarily refund electricity suppliers for part of the renewables obligation, for the years of 2026-27, 2027-28 and 2028-29. This obligation is paid by electricity suppliers but passed on to customers through their electricity bills. This will cost £2.3 billion in each year it operates. The UK government has also announced that it will not renew the Energy Company Obligation. Taken together, The UK government say that these two measures will reduce the average household energy bill by £150 per year.
New spending commitments and increasing fiscal headroom mean that tax increases were inevitable
Rather than raise revenue through increasing one of the major taxes, such as a broad increase in income tax rates, the UK Chancellor has opted to make a range of smaller changes to taxation.
Income tax
The fiscal drag continues, as the Chancellor has announced that the income tax and National Insurance thresholds for England will remain frozen at their current level until April 2031 – a three year extension beyond what had been announced by the previous Conservative government. This means that as salaries rise year on year, more people are pushed into higher income tax rate bands resulting in much higher tax receipts for the Exchequer. Some who previously earned below the personal allowance of £12,570 will also start paying tax if their earnings (or pensions) rise. The OBR forecast that this will be a significant driver of additional tax receipts, raising an additional £8 billion in 2029-30. However, not all of these decisions will affect Scotland. The personal allowance is set for the whole of the UK, as are National Insurance thresholds. However, other income tax thresholds are determined by the Scottish Government and will be set at the Scottish budget on 13 January 2026. More information on the interaction of UK and Scottish government tax decisions can be found in a recent SPICe blog.
Decisions on income tax rates on dividend and savings income apply across the UK and these will increase by 2 percentage points. This will reduce the gap between tax rates paid on different sources of income, with income from employment and self-employment taxed at higher rates due to National Insurance, which is not payable on dividend and savings income.
The Budget also proposed a new regime for income from property in England, Wales and Northern Ireland. This was previously treated as income from employment but, from April 2027, income from property will be subject to a basic rate of 22%, a higher rate of 42% and an additional rate of 47%. This is to reflect the fact that no National Insurance Contributions are payable on income from property. In Scotland, income from property is currently subject to devolved income tax so these changes do not apply. The UK government has stated that, with respect to the new property tax bands:
“The separate rates of tax on property income will apply to England, Wales and Northern Ireland. The government will engage with the devolved governments of Scotland and Wales to provide them with the ability to set property income rates in line with their current Income Tax powers in their fiscal frameworks.”
Once the Scottish Parliament has the powers to set income tax rates to property, it will presumably face a choice between at least matching the rates for England, or accepting a block grant adjustment which will reduce funding for the Scottish Budget. However, as noted above, the changes will not apply in the rest of the UK until April 2027.
Mansion tax
The Budget also included a high value council tax charge, widely dubbed a mansion tax. This is a supplement to council tax on homes valued above £2 million, and will apply only in England. From 2028 this is expected to raise £400 million per year. There will be four bands introduced, with homes valued at between £2 million and £2.5 million paying a surcharge of £2,500, rising to £7,500 for homes valued above £5 million. While council tax bills are set based on 1991 values in England, the surcharge will be based on 2026 values. Analysis by the Treasury suggests that this will apply to fewer than 1% of properties.
Non-domestic rates (business rates)
The Budget also introduces permanent lower business rates for retail, hospitality and leisure properties, at a cost of around £900 million per year, to be funded by higher rates on larger properties. This will apply in England only. It is certain that industry will advocate for the Scottish Government to implement similar changes for retail, hospitality and leisure properties in Scotland. Last year, when the UK government announced a temporary business rate relief, the Fraser of Allander Institute noted that due to differences in the business base, extending such a relief in Scotland would cost more than the Barnett consequentials provided. The fact that the changes in England are being funded by higher charges for larger properties means that the Barnett consequentials related to this particular measure are modest. However, other business rate support measures will generate Barnett consequentials.
Sugar Tax
The UK government also announced its intention to expand the sugar tax; increasing the scope to include milkshakes, flavoured milk and milk substitutes, as well as dropping the threshold for the tax from 5g sugar per 100ml to 4.5g. This will apply across the UK, and is expected to raise between £40 million and £45 million.
Electric car tax
The OBR expect fuel duties to raise over £24 billion in 2025-26, but as more drivers switch to electric vehicles (EVs) receipts from fuel duty will decline. The UK government has therefore announced a new mileage-based charge on EVs, additional to the current vehicle excise duty (VED) charges paid by all vehicles. This is a UK-wide tax that applies in Scotland, and will be introduced in April 2028. In 2028-29, the charge will equal 3p per mile for battery EVs and 1.5p per mile for plug-in hybrid cars, with rate per mile increasing annually with CPI.
The rationale for this change is that as EVs make up a greater proportion of UK cars, revenues from fuel duty will reduce. In their consultation, the UK government suggest that the average EV driver will pay around half the rate per mile that a driver of a petrol or diesel car pays through fuel duty. The average driver of a battery electric car in 2028-29 driving 8,500 miles would therefore be expected to be charged £255 in that year.
The new tax is expected to raise £1.1 billion in 2028-29, rising to £1.9 billion in 2030-31.
Cash ISAs
The Chancellor has announced reforms to the Individual Savings Account (ISAs) system that will apply across the UK. The full £20,000 allowance will remain, but £8,000 will now be designated exclusively for investment purposes, rather than for cash ISAs, which will now be capped at £12,000. Over 65s, though, will retain the full cash allowance of £20,000.
Energy profits levy
The OBR expects revenues from North Sea taxes (offshore corporation tax, including ring fence corporation tax and the supplementary charge, petroleum revenue tax, and the energy profits levy) to fall from £2.7 billion in 2025-26 to £0.3 billion in 2030-31. This continues the gradual decline in North Sea revenues over several decades due to falling production levels.
The budget does not end the Energy Profits Levy early, as had been called for by industry, but rather replace it with a new Oil and Gas Price Mechanism. This will apply an additional tax rate of 35% above price thresholds, which are set at $90 per barrel of oil and 90p per therm of gas. The current energy profits levy will remain in place until the floor set in the Energy Security Investment Mechanism is reached – the UK government suggests this is likely in the next few years. If this floor is not reached, the current Energy Price Levy will end by March 2030.
Gambling
The UK government is raising Remote Gaming Duty from 21% to 40%. Duty on online betting is increasing from 15% to 25%. No changes have been made to in-person gambling or horse-racing. Bingo Duty is also being entirely abolished from April 2026 from its current 10 per cent rate.
These reforms are expected to raise £1.1 billion by 2029-30 and will apply across the UK.
Impacts on Scottish Budget
As a result of spending changes announced in the Budget, the UK Chancellor stated that the Scottish Budget would be increased by £820 million. This reflects Barnett consequentials and is separate from direct spending announcements identified separately below. This increase is £510 million in resource funding over four years, and £310 million in capital funding over five years. Within this, £44.7 million in resource funding is available for the current financial year, with £307 million in resource and £23 million in capital available for 2026-27.
There is also a presentational change. Scottish Government resource funding is reduced in all years from 2025-26 onwards to reflect the transfer of police and fire balancing pension payments from DEL to AME. This is a technical change to be consistent with the treatment of other public pension schemes, and was mentioned in a recent Finance and Public Administration session on the Autumn Budget Revision.
The UK Budget has also been accompanied by new forecasts for the GDP deflator, which are used to uprate the borrowing limits. This means that the Scottish Government will be able to borrow up to £491 million in capital in 2026-27, while the cumulative capital borrowing limit rises to £3,275 million. The annual limit on resource borrowing increases to £655 million, with the cumulative cap rising to £1,910 million. Finally, the limit on the Scotland Reserve increases to £764 million.
Alongside their Economic and Fiscal forecasts, the OBR publish forecasts for devolved taxes. This forecasts that the Scottish tax Block Grant Adjustment (the amount removed from the Scottish Budget to reflect tax devolution) will be £21,382 million in 2026-27. This is slightly lower than the £21,658 forecast by the Scottish Fiscal Commission in May 2025. If the next forecast from the SFC expects a lower BGA than in May, this will be a boost for the Scottish Government.
Direct spending in Scotland by the UK Government
The UK government made several specific investment announcements relating to direct spending in Scotland as part of the Budget:
- £14.5 million in funding for the Grangemouth industrial cluster. The UK government pledge to work with the Scottish Government and the National Wealth Fund to decide how best to use this funding.
- £20 million from the Growth Mission Fund to upgrade Inchgreen Dry Dock, and a further £20 million for the redevelopment of Kirkcaldy town centre and seafront.
- Approval of a full business case for Forth Green Freeport, which involves signing a memorandum of understanding with the Scottish Government and releasing £25 million in seed capital.
- £1.5 million funding for two Scottish automotive companies from DRIVE35 funding round
Alongside the Budget, the UK government has also published a ‘North Sea Future Plan’. This relaxes the UK government ban on new oil and gas licences, permitting “limited oil and gas production in areas that are already part of an existing field”. A new North Sea Jobs Service will help the existing workforce to take up new opportunities in growing industrial sectors.
How will the Scottish Government react?
The Scottish Government will perhaps be relieved not to face an increase in income tax rates (which would have reduced funding available for the Scottish Budget), although in later years the UK decisions to freeze thresholds and introduce new rates for property income tax could have an effect. The budget for 2026-27 will have around £330 million more than anticipated in resource and capital funding due to Barnett consequentials. In addition, planned expenditure to mitigate the two child cap will now no longer be required, which the SFC had estimated would cost £11 million in 2025-26, and £151 million in 2026-27.
However, despite some elements of positive news for the Scottish budget, it is worth remembering that the Scottish Government’s latest medium term financial strategy projected that there would be a shortfall of £963 million in resource funding and £1,070 million in capital funding in 2026-27, so the Scottish Government still faces difficult decisions in next year’s budget.
Rachel Cook, Andrew Feeney-Seale, Nicola Hudson and Rob Watts, Financial Scrutiny Unit, and Andrew Aiton, Data Visualisation Manager