Scottish Property Income Tax Problem Needs Solving

Autumn Budget 2025:  Rachel Reeves confirmed that new ‘National’ investment income tax rates were being introduced and would all increase by 2% over income tax rates.

• Dividend Income Tax rates to increase by 2% from April 2026.
• Savings Income Tax on Cash/Deposit Interest to increase by 2% from April 2027.
• Property Income Tax to increase by 2% from April 2027 meaning:
• Basic Rate Taxpayers (20%) will pay 22% Property Income Tax.
• Higher Rate Taxpayers (40%) will pay 42% Property Income Tax.
• Additional Rate Taxpayers (45%) will pay 47% Property Income Tax.

Finance costs credit:  Mortgage and loan interest payments can no longer be fully offset against you income liability but a tax credit is offered at 20% of the finance interest costs only.  This has been confirmed that it will increase to 22%, meaning that property income tax basic rate tax payers (22%) in England, Wales and Northern Irland will not face any issues as they then get a 22% credit with higher rate and additional rate property tax payers still only facing a restriction on 20% (42% property tax less 22% credit) and 25% (47% property tax less 22% credit) of finance interest costs.

The problem being that investment income taxes are set at a National Level but normal income tax rates for earnings and pensions are set at a devolved government level i.e., Scotland sets it own rates of income tax. 

The Scottish Budget 2026/27 was published on 13 January 2026, and we uploaded our own video/article summary yesterday:

See Scottish Budget 2026/27.

Scotland’s Property Tax Problem

Property Income Tax is a brand-new tax, given it is currently taxed at our normal rates of income taxes.  The problems is that devolved government legislation means can set their own rates of income tax (legislation does not account for the new Property Income Tax). 

Scotland (already sets its own income tax rates) and Wales (has yet to set own its own income tax rates) but they both currently have no power to set new property income tax rates or property tax reducer credits.  Without action:

A Basic Rate Taxpayer in England (20%), will be liable to 22% Property Income Tax but with a 22% tax reducer for finance interest costs meaning the taxpayer is net neutral.

• An Intermediate Taxpayer in Scotland (21%), currently (without change) will be liable to a higher 22% Property Income Tax but with a 20% tax reducer for finance interest costs meaning the taxpayer may pay more tax than they currently do.

A Higher Rate Taxpayer in England (40%), will be liable to 42% Property Income Tax but with a 22% tax reducer for finance interest costs meaning property tax revenue remains the same.

• Higher Rate Taxpayers in Scotland (42%), currently (without change) will be liable to 42% Property Income Tax but with a 20% tax reducer for finance interest costs meaning the taxpayer may pay less tax as a proportion than they currently do.
• Advanced Rate Taxpayers in Scotland (45%), currently (without change) will be liable pay 42% Property Income Tax but with a 20% tax reducer for finance interest costs meaning the taxpayer may pay less tax as a proportion than they currently do.

Comment

Clearly, the UK government will need to take some action to expand the powers of devolved governments before April 2027, to ensure Scotland (and Wales if the do set their own rates), have powers to collect property income taxes and offer tax reducer credits at the levels that they wish to.