ECONOMIC PRIMER: Are we getting a rum deal from London? Previewing The Scottish Budget 2026 

When Shona Robison stands up in the Scottish Parliament this week, she faces some tough choices on how to allocate Scotland’s Budget. But there can be little doubt that despite increasing tax levels in Scotland, the lion’s share of Scotland’s money is delivered through the ‘temporary’ formula devised by Joel Barnett, the Chief Secretary to the Treasury, back in 1978.

A point that will be made by Scotland’s nationalist leadership is that Scotland’s is still getting a rum deal in terms of the money that is dispensed from HM Treasury. But is this the case?

“Shona Robison has announced she will not stand as an MSP in the May elections and perhaps our plea to her in her final Budget is that even if Scottish taxpayers require to pay more tax in order to enjoy the benefits of devolved decisions, it is an ideal time to reduce the number of rates of tax in play and to align the higher rate threshold in particular with the rest of the UK,” says Donald Parbrook, a tax partner at Azets.

THE BARNETT FORMULA STILL MATTERS

The Scottish Parliament is responsible for around £9bn in taxation. This was agreed in the Scotland Act 2012. Lord Smith of Kelvin oversaw the process. The Smith Commission published its report detailing Heads of Agreement on 27 November 2014.

Under the Smith Agreement powers as agreed in 2016, the Scottish Parliament was responsible for nearly £21bn in devolved and assigned tax revenue and over £2bn in demand-led welfare spending.

The Governments have agreed a set of fiscal tools to enable the Scottish Government to manage the additional risks and volatility associated with the devolution of these powers.

Even with the additional tax powers, the largest funding source for the Scottish Budget is still the Barnett “Block Grant” which is a transfer from the UK to the Scottish Government. The size of the Block Grant is set at each UK Budget.  The grant is calculated by taking the amount the Scottish Government was given the previous year – the “baseline” – which is then topped up or reduced using the Barnett formula, a mechanism which has been in place since the late 1970s.

According to the Scottish Fiscal Commission, when the UK Government changes its spending in devolved areas this results in Barnett consequentials for the Scottish Government which are added to the Block Grant.

For example, the National Health Service is devolved so if the UK Government increases health spending in England, the Scottish Government receives a population-based percentage share of that increase in spending. Changes in spending in reserved areas such as defence, do not lead to any changes in the Block Grant.

Barnett consequentials can be positive or negative depending on whether it’s a cut or an uplift to a UK Government department’s budget. Importantly, additional Barnett consequentials for Scotland can be spent on any devolved area.

MORE MONEY FOR FINANCING OF SCOTLAND    

However, there has always been an increase from the UK, never a reduction. So, while an independent Scotland would be in charge of all of its fiscal and monetary levers, at present it looks as if Scotland does get a fair deal, as part of the United Kingdom.

Budget Revisions usually take place twice a year: once in autumn around September, and once in spring around February.

Each allocates new funding and redistributes funding already allocated. New funding could be Barnett consequentials or increases to other sources of funding that were not anticipated, or funding that had been held centrally for contingencies.

According to Scottish Fiscal Commission, for at least a decade there has been no instance of overall discretionary funding levels going down in-year, and the Scottish Budget has grown with each revision. Of course, much of this is due to inflation, rather than purely extra monies for spending.

The Scottish Finance Secretary makes her decisions on spending by making reductions in one area to increase spending either in another area or in another financial year.

However, based on current trajectories, the Scottish Government expects spending to exceed available funding for both resource and capital. The gaps for both resource and capital are expected to exceed £2 bn by 2029-30, around 4 per cent of planned spending in 2029-30 for resource, and around 23 per cent for capital.

GENEROUS PUBLIC SECTOR PAY

The public sector in Scotland is significantly larger than across the rest of England and Wales. So public sector wages, from doctors, nurses, teachers, council workers and police and public safety, have a strong bearing on the nation’s cost.

Most of the devolved public sector workforce is now covered by agreed pay deals for 2025-26, and most deals agreed also cover 2026-27. The pay deals agreed have all exceeded the Scottish Government’s public sector pay policy (PSPP).

Under this policy, says the Scottish Fiscal Commission, deals that did not cover three years were to be limited to a 3 per cent increase in 2025-26, and the cumulative increase was to be limited to 9 per cent over the three years from 2025-26 to 2027-28. The deals agreed so far cover only 2025-26 and 2026-27, and some of these also have inflation protection clauses.

So the tough message from the outgoing Scottish Minister is likely to be restraint in public sector pay claims in the next 18 months.

Unless deals with nominal pay growth of around one per cent are accepted for 2027-28, the PSPP of 9 per cent pay increases over three years will be exceeded.

Shona Robison will need to be crystal clear about this in her presentation.

Pay is also just one part of the nation’s pay bill, which also covers employer pension contributions and employer National Insurance contributions (NICs) and is affected by the size and composition of the workforce. The Labour Government’s decision to hike NICs has had a profound impact on the public wage bill in Scotland.

TIME TO SIMPLIFY SCOTLAND’S TAX RULES

Many middle to higher earners in Scotland will be wanted to her some better news on personal taxation. Donald Parbrook, a tax partner at Azets, argues now is the ideal time to simplify Scotland’s complex tax rules and achieve better alignment between the country and England.

Parbrook said: “While our fiscal position may leave Shona Robison, the outgoing SNP finance minister, with relatively few options, taxpayers in Scotland surely find the Scottish income tax rates and bands system needlessly complicated.

Test of the UK has three income tax bands of 20 per cent, 40 per cent and 45 per cent, but Scotland has no fewer than six rates, with different thresholds (19 per cent, 20 per cent, 21 per cent, 42 per cent, 45 per cent and 48 per cent).

“That is complicated enough, yet Scottish taxpayers also have to remember some tax is not devolved, and must therefore apply the normal UK tax bands and thresholds to their dividend and savings income. It can all be rather confusing. People need a clearer tax road map.”

The complexity also affects rental income.

 “Rachel Reeves announced UK-wide changes for rental income taxation. This will create rates of 22 per cent, 42 per cent and 47 per cent. If the 2 per cent differential is replicated in Scotland we will have 12 Scottish rates on income, as well as three UK normal ones – so a total of 15 rates could be relevant to a single taxpayer. This cannot be truly necessary, and it’s all before you draw National Insurance contributions into the mix or remember dividend income has different rates too.”

Another issue is that the Scottish higher rate tax threshold is over £6,500 lower than the rest of the UK’s £50,270.

“The higher UK threshold is aligned with the point that employees’ National Insurance drops from 8 per to 2 per cent. The result is that in Scotland workers earning around £50,000 are losing 50 per cent of their top slice of earnings (42 per cent tax and 8 per cent national insurance) while their English equivalent pays 28 per cent with around £100 a month difference in net pay for that issue alone.

“The Scottish tax differentials also see an effective tax and NIC rate of 69.5 per cent on a slice of income above £100,000 due to the way the personal allowance is tapered. These are eye-watering rates and may leave those with the broadest shoulders feeling legitimately frustrated. Pension contributions remain an effective mitigation tool for many, but not all.”

The Scottish Budget will set the tone for 2026 in Scotland. For citizens and businesses, it has now become another nervous day of calculating the impact.