When Scotland’s finance secretary, Shona Robison, delivered the Scottish budget for 2026-27 on January 13, she framed it as a budget for families that would ease pressure on household finances. Coming only a few months before the Scottish parliamentary elections in May, this budget is especially significant.
On income tax, the message from the Scottish National Party-led government was clear. Hitting out at recent UK national budgets, Robison argued, correctly, that freezing income tax thresholds means that more of people’s pay is taxed, or taxed at a higher rate. She told the Scottish Parliament: “I am making a different choice.”
While it’s true there is a difference, in reality that difference is limited. The Scottish parliament sets income tax rates and bands on most income earned by taxpayers in Scotland. Unlike in the rest of the UK, there are six rates – starter, basic, intermediate, higher, advanced and top – ranging from 19% to 48%.
What matters is not the number of bands but the size of the jump between them. Income in the intermediate band is taxed at 21% up to £43,662. Income above that point is taxed at 42%.
However, the UK parliament still controls key elements of the system, including allowances, reliefs and tax on savings and dividend income.
While some of Scotland’s income tax thresholds have been raised in this budget, others were left frozen. This means many people will still see their tax bills rise over time, even though headline tax rates have not changed. The mechanism behind this is known as fiscal drag.
Fiscal drag occurs when tax thresholds remain fixed while wages rise. As earnings increase, more income falls into higher tax bands and more people cross into higher rates. As such, governments generate more revenue without any explicit tax rise.
This matters because wages in Scotland have been rising in cash terms. In 2024, the median weekly pay for full-time employees was £739.70 (around £38,500 a year), with nominal earnings rising by 4.3% over the previous year. Median pay for men working full-time was closer to £40,000.
And those figures are already dated. Further pay settlements, particularly in the public sector, mean typical earnings in the years 2026 to 2029 are likely to go up further. Scotland’s higher-rate income tax threshold, however, remains frozen at £43,663.
That leaves a narrow gap between average earnings and the higher-rate tax band (42%). A few years of ordinary pay rises can be enough to push someone over the threshold, even if their job and living standards feel largely unchanged. As a result, fiscal drag increasingly affects mid-career professionals in areas like teaching, nursing and the civil service, rather than solely very high earners.
What the budget changed and what it did not
The recent Scottish budget raises the lower limits of the starter, basic and intermediate income tax thresholds, meaning more income is taxed at lower rates. This goes some way to protecting those whose pay falls in these bands. Ministers can say, accurately, that many lower- and middle-income earners will pay less tax than they would elsewhere in the UK.
But the higher-rate threshold remains frozen until 2028–29 at £43,663. Income above that level will be taxed at 42%. The advanced and top-rate thresholds are also unchanged. By freezing these, the Scottish government is ensuring that rising wages continue to translate into higher tax bills over time.
In design terms, it is using the same fiscal drag mechanism (albeit more selectively) that it criticises when Westminster deploys it.
Here’s a simple example. Consider a full-time worker earning £38,500 in 2024, close to the Scottish median. With annual pay rises of around 4.3%, their salary would reach roughly £40,200 in 2025, £41,900 in 2026, and just over £43,700 by 2027. Note that most of this increase in pay reflects inflation, rather than a real improvement in living standards.
But the freeze on the higher-rate threshold remains in place. So by 2027, the worker is already at or just above this higher-rate threshold. A modest further pay rise or promotion would push part of their income into the 42% band (or potentially 45%), where it had previously been taxed at 21% in the intermediate tax band.
No headline tax rate has changed, but more income is taxed – and taxed at a higher rate. This matters politically because it is the point where economics turns into politics.
Alexey Fedorenko/Shutterstock
Fiscal drag is not a technical quirk. It is a political instrument. As my research on UK budgets shows, when governments commit to avoiding headline tax rises, attention shifts to thresholds and design instead.
Politically, the approach allows the SNP to present the budget as both fair and responsible ahead of the May Scottish parliament elections. Ministers can point to tax cuts for lower earners while maintaining that headline tax rates have not increased.
The strategy is also shaped by tight fiscal constraints. The Scottish budget relies on a block grant from Westminster that has been squeezed by inflation, while borrowing powers are limited and spending cuts are difficult. As such, additional revenue has to come from the tax system, making fiscal drag through frozen higher thresholds an attractive option.
Freezing thresholds while nominal wages rise brings in revenue quietly and predictably, without the backlash associated with explicit tax increases. It also blurs responsibility, as higher tax bills can be attributed to inflation or pay growth, rather than deliberate policy choices. In an election year, that combination is especially attractive.
The budget cuts income tax for many people on lower incomes. Further up, it tells a different story. By freezing the higher, advanced and top-rate thresholds – which include many people who are not what most would consider “high earners” – the Scottish government has chosen to let rising nominal wages do the work of a tax increase. The effect is gradual and uneven – and people often notice it only when it appears on a payslip.
