The Scottish Budget for 2026/27 was presented to the Scottish Parliament on 13 January 2026.1 This report summarises key employment tax compliance considerations for global organisations with employees based in Scotland.
WHY THIS MATTERS
The U.K. tax authorities (HMRC) will notify employers of the ‘Scottish taxpayer’ status of their employees for most payroll withholding purposes. However, employers that operate Appendix 6 modified payroll agreements for tax-equalised expatriates might need to determine whether individuals included in a modified payroll scheme are Scottish taxpayers based on the applicable statutory tests, relevant facts, and HMRC’s published guidance on Scottish taxpayer status and apply the relevant Scottish rates where appropriate.3
Employers may also need to take account of Scottish rates of income tax when calculating the tax due under a ‘pay as you earn’ (PAYE) Settlement Agreement to pay income tax on employees’ behalf on minor or irregular benefits.
International assignment cost projections, budgeting, and where relevant hypotax calculations, should reflect the rates and bands noted in this newsletter when they take effect.
Scottish Budget 2026/27
Income Tax Announcements
There are no changes to the Starter (19 percent), Basic (20 percent), Intermediate (21 percent), Higher (42 percent), Advanced (45 percent) and Top (48 percent) rates of income tax that apply to the relevant income of Scottish taxpayers for 2026/27.2
From 6 April 2026, the Basic and Intermediate thresholds (i.e., the income levels at which those rates come into effect) will each increase by 7.4 percent, which will result in more of Scottish taxpayers’ relevant income being taxed at the lower Starter and Basic rates. The Higher, Advanced, and Top rate thresholds will remain unchanged.2
Rates and Bands
The tax rates and bands that apply to relevant income of Scottish taxpayers from 6 April 2026 are shown below. These assume that the taxpayer receives the standard U.K. income-tax-free Personal Allowance for 2026/27 (which reduces by £1 for every £2 of adjusted net income over £100,000).
Band | Relevant Income | Tax Rate |
Personal Allowance | Up to £12,570 | 0 percent |
Starter | Above £12,570 to £16,537 | 19 percent |
Basic | Above £16,537 to £29,526 | 20 percent |
Intermediate | Above £29,526 to £43,662 | 21 percent |
Higher | Above £43,662 to £75,000 | 42 percent |
Advanced* | Above £75,000 to £125,140 | 45 percent |
Top | Above £125,140 | 48 percent |
Source: KPMG LLP (U.K.)
* The personal allowance reduces by £1 for every £2 of taxable income above £100,000.
How the Scottish Income Tax System Works
Devolved Income-Tax-Setting Powers
Income tax is partially devolved in the U.K., with certain powers exercised by the Scottish Parliament in relation to Scottish taxpayers (see below), and all other income-tax powers exercised by the U.K. Parliament in relation to all U.K.-resident individuals.4
Scottish taxpayers are entitled to an income-tax-free Personal Allowance set by the U.K. Parliament (subject to their personal circumstances), and are subject to tax on savings income (i.e., interest) and dividends based on the same bands and rates as other individual U.K. taxpayers.
However, Scottish taxpayers are subject to income tax on non-savings and non-dividend income (e.g., employment income) based on rates and bands set by the Scottish Parliament.
KPMG LLP (U.K.) INSIGHTS
As the Scottish government is a minority administration, individual measures are, potentially, subject to amendment during the Budget process as support from opposition parties is necessary for the Budget to pass. However, as the main opposition party in the Scottish Parliament has indicated that it is unlikely to oppose the Budget, the proposed income tax rates and bands are likely to come into effect.
Scottish Taxpayer Status – ‘Close Connection’ and ‘Day Counting’ Tests
In summary, an individual will be a ‘Scottish taxpayer’ for a particular U.K. tax year if he or she is U.K. tax resident and has a ‘close connection’ with Scotland based on the location of his or her U.K. place of residence. U.K.-source income received by non-U.K. tax residents will be subject to U.K. income tax based on the main U.K. rates and bands, regardless of whether or not that income might be regarded as originating in Scotland.
An individual who cannot establish a ‘close connection’ with any part of the U.K. (i.e., England, Northern Ireland, Scotland, or Wales) based on his or her place of residence, will be a Scottish taxpayer if he or she spends more days in Scotland than in each of England, Northern Ireland, and Wales individually.
It might therefore be necessary to count days spent in Scotland during a U.K. tax year to establish whether an individual is a Scottish taxpayer.
KPMG LLP (U.K.) INSIGHTS
Consideration for Employers
Employers may wish to assess whether they can correctly identify Scottish taxpayers amongst their international assignee and cross-border employee population (including implementing arrangements to record days spent in Scotland and each other part of the U.K.).
If assignees and/or their programme managers have any questions or concerns about the scope of the update, its application and potential impacts, and appropriate next steps, they should consult with their qualified tax professional or a member of the GMS tax team with KPMG in the United Kingdom (see the Contacts section).
FOOTNOTES:
1 See Scottish government, Publication - Corporate report: “Scottish Budget 2026 to 2027,” published on 13 January 2026.
2 See Scottish government website, “Publication - Factsheet: Scottish Income Tax 2026 to 2027: Technical Factsheet,” published on 13 January 2026.
3 See the HMRC internal manual, “Scottish Taxpayer Technical Guidance,” published on 26 October 2015.
4 For comparison with the main U.K. income tax bands and rates, see GMS Flash Alert 2025-247, United Kingdom – Autumn Budget 2025: Tax Rises for All, published on 26 November 2025.
Contacts
Disclaimer
The information contained in this newsletter was submitted by the KPMG International member firm in the United Kingdom.
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