The Scottish Budget for 2026-27, presented to the Scottish Parliament on 13 January 2026 by Cabinet Secretary for Finance and Local Government Shona Robison, outlines the Scottish Government's proposed spending and taxation plans for the financial year beginning in April 2026. This budget reflects the distinct fiscal framework that applies in Scotland, shaped by devolution, and includes targeted measures to support public services, economic recovery, and specific sectors.

What is the Scottish Budget and How Does It Differ from the UK Budget?

The Scottish Budget is the annual financial plan set by the Scottish Government and approved by the Scottish Parliament. It determines funding allocations for devolved matters, including health, education, transport, justice, local government, social care, childcare, and housing. Unlike the UK Budget, which is presented by the UK Chancellor of the Exchequer and applies across the entire United Kingdom, the Scottish Budget applies only in Scotland and focuses on areas where legislative and fiscal powers have been devolved.

The distinction arises from the process of devolution, which began with the establishment of the Scottish Parliament in 1999 following the Scotland Act 1998. Initially, the Scottish Government relied primarily on a block grant from the UK Government, calculated using the Barnett Formula. This formula adjusts Scotland's funding in line with changes in public spending on comparable devolved services in England, ensuring Scotland typically receives higher per capita spending due to factors such as geography, population distribution, and service delivery costs.

Subsequent legislation—the Scotland Acts of 2012 and 2016—expanded Scotland's fiscal powers. These reforms devolved authority over income tax rates and bands (on non-savings and non-dividend income), Land and Buildings Transaction Tax (replacing Stamp Duty Land Tax), Scottish Landfill Tax, and non-domestic rates (business rates). The UK Government retains control over reserved matters, including corporation tax, Value Added Tax (VAT), National Insurance contributions, capital gains tax, fuel duty, and alcohol duty. Consequently, while the UK Budget shapes overall economic policy, welfare, and reserved taxation, the Scottish Budget allows the Scottish Government to tailor tax and spending decisions to Scotland's priorities, often resulting in different income tax structures that are more progressive than those in the rest of the UK.

The two budgets remain interconnected: UK Budget decisions on reserved taxes or English spending can influence Scotland's block grant, and Scotland's borrowing powers are limited compared to those of the UK Government.

Key Changes Announced in the 2026-27 Budget

The budget introduces a mix of tax adjustments and reliefs, with a focus on supporting public services and certain economic sectors. Major announcements include:

• Income Tax Thresholds: The thresholds for the Basic (20%) and Intermediate (21%) rates are increased by 7.4%, providing relief for lower and middle earners. Thresholds for the Higher, Advanced, and Top rates remain frozen, which is expected to generate additional revenue of approximately £190 million in 2026-27 by drawing more taxpayers into higher bands over time. These changes take effect from 6 April 2026, aligning with the start of the tax year.
• Non-Domestic Rates (Business Rates) Relief: A new 15% relief is introduced for retail, hospitality, and leisure premises, applicable to properties with a rateable value up to £100,000 and capped at £110,000 per business. This measure is valued at £138 million over three years. The existing Small Business Bonus Scheme, which provides 100% relief for many small premises and benefits around 10,000 businesses, will be continued for three years. These reliefs apply from 1 April 2026, the start of the business rates billing year.
• Other Notable Measures: A mansion tax on properties valued over £1 million is planned for introduction by April 2028. A targeted revaluation of high-value homes will create two new higher council tax bands. An air departure tax will apply to eligible passengers, with exemptions for the Highlands and Islands and a specific levy on private jets.

Impact on Small and Medium-Sized Businesses

Small and medium-sized enterprises (SMEs) form a vital part of Scotland's economy, particularly in retail, hospitality, and leisure sectors. The budget includes targeted support for these businesses through business rates reliefs, though broader tax measures have elicited mixed reactions.

The 15% non-domestic rates relief represents a meaningful cost reduction for eligible retail, hospitality, and leisure premises, many of which are owned or operated by SMEs. This relief is more generous than equivalent measures in England for smaller properties but includes a cap that may limit benefits for larger operators. The continuation of the Small Business Bonus Scheme ensures that thousands of small premises continue to pay no business rates, providing stability and reducing overheads for independent shops, cafes, and other local businesses.

These reliefs are particularly welcome in sectors still recovering from economic pressures, as they help mitigate rising costs and support employment. However, business groups such as the Federation of Small Businesses have noted that the measures do not fully address concerns over wider tax burdens or provide relief across all sectors.

On income tax, the 7.4% uplift in lower thresholds benefits employees in SMEs by increasing take-home pay for those earning below higher-rate levels. For business owners who draw income through salaries, this may slightly ease payroll pressures. However, the freeze on higher thresholds means higher earners—including some SME owners or managers—will face a gradual increase in tax liability, potentially affecting investment decisions or wage growth.

Overall, the budget prioritises sector-specific support over universal reductions in business taxation. While the reliefs offer practical assistance to many SMEs, particularly in consumer-facing industries, the absence of broader reforms to business rates or other costs has led some stakeholders to call for more comprehensive measures to stimulate growth.

In summary, the Scottish Budget 2026-27 balances progressive taxation with targeted reliefs, reflecting Scotland's devolved powers. For SMEs, the enhanced business rates support provides tangible benefits from April 2026, though ongoing economic challenges may require further policy attention in future budgets.

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