Hidden fiscal drags for taxpayers to be aware of in Scotland

10th November 2025

The primary "hidden fiscal drag" for taxpayers in Scotland (as with the rest of the UK) is the freezing of various tax allowances and thresholds during a period of inflation and wage growth. As wages increase, more of a person's income becomes taxable or is pushed into higher tax brackets, a process often referred to as a "stealth tax".
Key hidden fiscal drags for Scottish taxpayers to be aware of include the following.

Frozen UK-wide Personal Allowance
The UK Government has frozen the tax-free personal allowance at £12,570 until April 2028. As wages rise, more individuals are pulled into paying income tax for the first time, and existing taxpayers lose a larger portion of their income to tax. This applies to all Scottish taxpayers as personal allowance policy is reserved to the UK Government.

Frozen Higher, Advanced, and Top Rate Thresholds in Scotland
The Scottish Government has frozen the thresholds for the higher, advanced, and top rates of income tax.

The Higher Rate threshold remains at £43,662.
The Advanced Rate band starts at £75,001.
The Top Rate (47p) starts at £125,140.

As a result, more Scottish taxpayers, particularly those with middle and higher incomes (above around £30,318), are drawn into paying higher rates of tax compared to if the thresholds had risen with inflation or matched rest of the UK (rUK) thresholds. For example, the rUK higher rate threshold is £50,270.

The 67.5% Tax Trap
Scottish taxpayers earning between approximately £100,000 and £125,140 face an effective marginal tax rate of 67.5% due to the withdrawal of the personal allowance (£1 for every £2 earned over £100,000) combined with the Scottish Advanced Income Tax rate.

Frozen Inheritance Tax Thresholds
Like the income tax personal allowance, inheritance tax thresholds have been frozen across the UK, meaning that more families are likely to be liable for inheritance tax as the value of their assets (like property) increases over time.

Frozen Pension Lifetime Allowance
While not an annual threshold, the freezing of the pension lifetime allowance (and subsequent removal and replacement with allowances/limits) pushes more people into facing a tax charge on their pension savings, particularly with strong investment growth over time.

High-Income Child Benefit Tax Charge (HICBC)
The threshold for HICBC has been frozen for many years, meaning that a growing number of families are affected by this charge as wages rise, even if their real income hasn't significantly increased over time.

These measures effectively increase the government's tax take without the political friction of explicitly raising headline tax rates, leading to a reduction in taxpayers' take-home pay and overall spending power in real terms.