2. Fairer, Simpler, Lower Taxes 🟡

Scotland already sets the rates and bands on most earned income. It does not set the personal allowance, National Insurance, inheritance tax, corporation tax, VAT, or most capital taxes. Any serious account of tax has to start there. A coherent aim is a system that is easier to understand, less punitive of extra work, and still able to fund services. The question is which parts of that aim can be done with the powers that exist.

Current reality

Legal and institutional position

Scottish income tax is not a separate tax. Under the Scotland Act 1998, as amended by the Scotland Acts 2012 and 2016, the Scottish Parliament sets the rates and thresholds on non-savings, non-dividend income of Scottish taxpayers. HMRC collects it. The UK Parliament sets the personal allowance, the definition of taxable income, and how savings and dividend income are treated. National Insurance, inheritance tax, corporation tax, VAT and capital gains tax remain reserved.

Council tax is a fully devolved local tax. Bands, multipliers, discounts, and whether the tax is replaced at all, sit with the Scottish Parliament and local authorities. Valuation still relies on estimated open-market values as at 1 April 1991.

The fiscal framework then adjusts the block grant when Scottish income-tax policy diverges from the rest of the UK. The purpose of that adjustment is that neither government should automatically gain or lose from the act of devolution itself. Because Scotland’s income distribution is not the same as the UK’s, large cuts at the bottom are not costless.

The latest official numbers

For 2026–27, the Scottish Government’s published rates, assuming the UK personal allowance of £12,570, are:

• Starter 19% — £12,571 to £16,537
• Basic 20% — £16,538 to £29,526
• Intermediate 21% — £29,527 to £43,662
• Higher 42% — £43,663 to £75,000
• Advanced 45% — £75,001 to £125,140
• Top 48% — above £125,140

The personal allowance is tapered by £1 for every £2 of income above £100,000 and is gone at £125,140. Combined with National Insurance, that produces a zone of very high effective marginal rates.

The rest of the UK still uses three main rates: 20%, 40% and 45%, with the basic-rate limit at £50,270. Scotland has six rates. The higher-rate threshold is £43,663, not £50,270.

The Scottish Government’s own factsheets, and independent work by the Scottish Fiscal Commission and the Institute for Fiscal Studies, show the same pattern. Roughly the lower half of Scottish income-tax payers pay slightly less than they would under rUK rates. The saving is small — typically tens of pounds a year, almost all from the 19% starter rate. Above about £33,500 the gap reverses. At £50,000 the extra is around £1,500 a year. At £125,000 it is around £5,200, before National Insurance. Between £43,663 and £50,270, the combined income-tax-plus-employee-NI marginal rate is 50%, 22 points above the equivalent rUK combined rate.

The Scottish Fiscal Commission has forecast income tax at £21.5 billion in 2026–27. Extra revenue from divergence is real. It is also smaller than a static calculation. For the top rate to rise to 48%, the Commission’s working assumption was that around 85% of the mechanical yield would be offset by behavioural change. Elasticities at the top are high, and the error bands are wide. The direction is not seriously disputed: squeezing a narrow top band does not raise money one-for-one.

Council tax still uses eight bands on 1991 values. A Band H property pays 2.45 times Band D and three times Band A on the current multipliers, even though 1991 values in Band H were at least eight times Band A. The tax is regressive relative to property value. Scottish Government–commissioned IFS work in 2025 found that a pure revaluation on recent values, keeping the same national share in each band, would move about half of properties: roughly a quarter down and a quarter up. Average values have not risen evenly. Aberdeen City and East Lothian are not the same housing market.

How it is experienced

Complexity is not a technicality. Six rates and a frozen UK allowance make it hard for a person to know their marginal rate. The step at £43,663 changes over time, and promotion and second-job decisions affect it in ways the rUK schedule does not. Council tax on a 1991 value is hard to defend to someone whose street has risen far faster, or far slower, than the Scottish average.

How it got here

From 2017 onward, rate-and-band powers were used to make the earned-income schedule more progressive than the rest of the UK. Lower bands were held down; higher, advanced and top rates were set above rUK. Top thresholds have been frozen in cash. The personal allowance was frozen at UK level. Council-tax reform has been consulted on and not done. The 1991 base has now lasted a generation.

What has already been tried

Divergence has raised net revenue, though by less than the static gap. Band tweaks at the bottom have produced a politically useful “more than half pay less” fact and a very small cash difference. Council-tax consultations, COSLA processes and detailed IFS options have not produced revaluation. Incremental talk of extra top bands leaves the 1991 foundation in place.

What needs to happen

A tax system that people can follow, that does not apply a 50% combined marginal rate in the middle of the distribution as a side-effect of band design, and that funds services without assuming the top of a small base can be squeezed without limit.

In measurable terms:

• fewer rates, or at least a schedule whose marginal rate can be stated in one sentence
• a smaller gap between the Scottish higher-rate threshold and the rUK basic-rate limit, or an explicit decision that the gap is intended
• a published account of behavioural yield at the top, not only static yield
• a council-tax base that is a current value, not a 1991 value

Sequence. Decide what the devolved schedule is for: revenue, progressivity, or simplicity. Those three conflict at the current top rates. Then revalue council tax, with transitional protection costed in the budget, not promised later.

Workforce, capital and standards matter less here than in the NHS item. The equivalent constraints are administration (HMRC still collects), the fiscal framework, and local-authority dependence on the council-tax yield — around £3 billion.

Twelve-month test. A serious year would show either a simpler income-tax schedule, or a dated decision to revalue, or a public statement that neither will happen and why. Another consultation without a valuation date is not reform.

The draft of this item pointed toward a much higher allowance, a 25% upper rate, no inheritance tax, and a different local tax. Those are statements of direction. They are not all available now. The published analysis has to separate them.

What can be done under current powers?

The Scottish Parliament can change every rate and threshold on the devolved income-tax base. It can cut the number of bands. It can lower the 42%, 45% and 48% rates. It can raise the higher-rate threshold. It can revalue, re-band, change multipliers, or replace council tax.

Who holds the lever is therefore not in doubt. The statute is the Scotland Act settlement. The budget consequence is the fiscal framework.

What is unused is mainly political: revaluation; a simpler upper schedule; an end to treating another 1p on the top rate as if it were a reliable cash machine.

If management of those levers changed tomorrow, the personal allowance would still be £12,570 until the UK changed it. Inheritance tax would still be a UK tax. A clean £30,000 tax-free amount cannot be legislated in Holyrood.

Where the limits are

Law. Personal allowance, NI, IHT, corporation tax, VAT and CGT are reserved. A true allowance of £30,000, abolition of inheritance tax, or a flat tax on the whole income-tax base is not a Scottish instrument.

Money. Large cuts at the bottom or a sharp flattening at the top reduce receipts. Behavioural response offsets some of the cost of cutting top rates and some of the gain from raising them. The fiscal framework does not let Scotland export the bill for a big effective rise in the tax-free amount. Scotland would have to pay for that in the budget.

Workforce and capital are secondary here, except for local-authority billing and the assessors who would have to revalue.

Time and UK-wide systems. HMRC administers Scottish income tax. Cross-border residence, dividend switching and pension contributions are UK-wide behaviours. Scotland cannot close those channels by a Holyrood rate change.

Political difficulty is not legal impossibility. Council-tax revaluation is hard because it creates visible losers. It is still competent. Leaving 1991 values in place is a choice.

What is not yet known

The exact taxable-income elasticity at the Scottish top is still uncertain. Commission and HMRC work point in the same direction; the intervals are wide.

It is not cleanly clear how much of the weaker growth in the Scottish tax base is policy and how much is the underlying economy.

The net cost of a specified transitional scheme for council-tax revaluation depends on the design not yet chosen.

Honest summary

Achievable now: fewer bands; lower upper rates; a higher Scottish higher-rate threshold; revaluation and redesign of council tax.

Only partly achievable: a simpler and less punitive earned-income schedule that still funds the current public-service path. The revenue arithmetic and the fiscal framework bind.

Not achievable under present powers: a £30,000 indexed personal allowance, abolition of inheritance tax, or a comprehensive flat tax on the whole UK-defined base.

Colour mark: yellow. Enough of the system is devolved to change complexity, marginal rates on the Scottish schedule, and the council-tax base. The fullest version of “fairer, simpler, lower” is blocked by reserved taxes and by the framework. Green would overstate what Holyrood can do to the first pounds of income and to inheritance. Red would erase the unused council-tax power and the unused room to simplify the six-rate schedule.

This item does not settle the overall fiscal starting position, the size of the state, or whether further tax devolution should happen. Those belong in the Independence Debate.

Connection

This item binds, and is bound by, public-service items in The 28 — including the NHS — because rate cuts have to be paid for. It connects directly to Independence Debate sections on public finances and on the institutions of a tax authority. It does not depend on the legal route to a referendum. A different schedule could be set in the next Scottish Budget.