As widely expected, the 2025 Budget confirmed income tax thresholds will be frozen beyond April 2028 for a further three years until April 2031.
As a result, “fiscal drag” will continue for years to come as wages rise and more taxpayers are pulled into the next tax threshold, meaning their income above the threshold is subject to a higher rate of tax.
With seven tax bands in Scotland, fiscal drag is more pronounced, and many will be looking ahead to the Scottish Budget on 13 January 2026 to find out how devolved income tax rates and bands will be set – with the exception of the £12,570 personal allowance set by the UK Government.
Last year, Finance Secretary Shona Robison announced increases to the starter rate and basic rate thresholds, however, these small tax savings do very little to ease the pain of fiscal drag for many. She made no adjustment to the higher rate threshold, which has been frozen for five years.
The UK Budget also announced a 2% increase on dividend income, savings income and property income.
Property income is devolved to Scotland, meaning landlords will not be affected by the 2% increase on rental income, however the Scottish Government may make similar changes in its budget next month.
The changes to dividend and savings rates, however, will apply in Scotland, as the Scottish Government can only set income tax rates and bands on non-savings non-dividend (NSND) income.
The increase to dividend rates is due to apply from April 2026 and will see the ordinary rate rise from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. The dividend rate for additional rate taxpayers is to remain unchanged at 39.35%.
From April 2027, tax on savings income will also increase by 2% across all savings tax bands, resulting in the tax rates on savings being 22% for basic rate taxpayers, 42% for higher rate taxpayers and 47% for additional rate taxpayers.
The way individuals report and pay tax on these sources of income remains unchanged; however, these new rates will undoubtedly see the tax position for many individuals becoming more complex, with multiple different tax rates applying to different sources of income.
For certain individuals (sole traders and landlords), these changes come in addition to the extra complexities and costs they face with the introduction of Making Tax Digital for Income Tax Self Assessment, which will apply from 6 April 2026, where income from self-employment and property exceeds £50,000. From 6 April 2027, the threshold will fall to £30,000 and then to £20,000 from 6 April 2028.
For advice and support about how these changes impact you, please get in touch. Call 01387 955900 or email help@armstrongwatson.co.uk.
