First Minister's cost of living guarantee in Scotland - Taxes and Fiscal Drag

11th May 2025

The Scottish Government's cost of living guarantee will help to deliver vital support for the people of Scotland, First Minister John Swinney has said.

The Programme for Government 2025-26 commits to a range of measures which will help households in a challenging economic climate.

The cost of living guarantee includes:

Lower income tax than in England for the majority of workers.
Lower earners (under £30,000) see small differences in take-home pay.
Middle earners (£50,000-£75,000) pay £1,000-£1,500 more in Scotland.
Higher earners (£100,000+) pay significantly more in Scotland due to the higher tax rates.

Continuation of free prescriptions and free eye appointments
Free bus travel for 2.3 million people'

Scottish undergraduate students will continue to pay no tuition fees'

Funded childcare hours, which would otherwise cost families more than £6,000 a year per eligible child.

Free school meals, which save the average family who take up the offer £400 per child per year, will be expanded, and more breakfast clubs introduced.

Winter fuel payments restored for Scottish pensioners in 2025-26.
Pensioners receiving qualifying benefits (such as Pension Credit) will get £300 or £200, depending on their age.
All other pensioner households will receive £100, providing support not available elsewhere in the UK

The Programme for Government also committed to scrapping peak rail fares for good from September.

The First Minister said:

"This Scottish Government will always do what it can to deliver the best deal for the people of Scotland.

"Our cost of living guarantee is delivering real savings for hard-pressed households across the country and it goes further than any package offered in the rest of the UK.

"These policies are already saving people money year on year, in the form of free prescriptions, free bus travel and more. This year we will go even further, funding the restoration of winter fuel payments for every pensioner in Scotland after they were abandoned by the UK Government. And from September, we will be scrapping peak rail fares for good - delivering a better deal for commuters.

"I know that too many people are still struggling during the cost of living crisis and that is why my government is taking action to keep more money in people's pockets during tough times."

More on Taxes
Tax changes impact different income brackets in various ways, often depending on threshold adjustments, rate increases, and allowances. Here's a breakdown:

Low-Income Earners (£12,570 - £30,000)
Personal Allowance remains frozen at £12,570, meaning wages rising due to inflation could push more people into taxable income.

Lower tax bands in Scotland (Starter & Intermediate rates) mean slightly lower tax compared to England.

National Insurance cuts in 2024 helped increase take-home pay.

Middle-Income Earners (£30,000 - £75,000)
Fiscal drag (threshold freezes) means more people are paying higher-rate tax as wages increase.

Scotland's Intermediate & Higher Rates (21% & 42%) mean higher tax bills compared to England.

National Insurance reductions softened the impact slightly.

High-Income Earners (£75,000+)
Loss of Personal Allowance: Those earning £100,000+ lose £1 of their allowance for every £2 earned over this amount.

Higher tax rates in Scotland: The Advanced Rate (45%) and Top Rate (48%) mean significantly higher tax bills compared to England.

Frozen thresholds mean more people are pushed into higher tax brackets over time.

Fiscal drag is quietly pulling more people into higher tax brackets, increasing tax bills without official rate hikes. Here’s how it’s affecting incomes:

Key Impacts of Fiscal Drag
More People Paying Higher Taxes - Since tax thresholds have been frozen since 2021, rising wages and inflation mean millions more taxpayers are now paying higher-rate tax.

Loss of Personal Allowance – Those earning £100,000+ lose their tax-free personal allowance, increasing their effective tax rate.

Stealth Tax Effect – The government is collecting billions more in tax revenue without officially raising tax rates.

Reduced Take-Home Pay – Even modest pay rises can push workers into higher tax bands, meaning they take home less than expected.

Impact on Benefits – Some taxpayers lose eligibility for benefits (like Child Benefit) when their income crosses certain thresholds.

Who’s Affected Most?
Middle-income earners (£30,000-£75,000) are seeing higher tax bills due to frozen thresholds.

Higher earners (£75,000+) are paying significantly more tax as more of their income is taxed at 40% or 45%.

Low earners may be pulled into paying income tax for the first time due to wage increases.