Scottish Income Tax Bands 2025/26

For directors living in Scotland (defined by your main residence code 'S' on your tax code), the rules for Income Tax on non-savings, non-dividend income are different from the rest of the UK.

However, a crucial distinction often confuses directors: Dividend Income is taxed at UK rates, not Scottish rates.

This guide explains how the two systems interact and what it means for your efficiency.

The 6 Scottish Tax Bands (2025/26)

Scotland has a more progressive system with six distinct bands.

| Band | Income Range | Rate | | :--- | :--- | :--- | | Personal Allowance | £0 - £12,570 | 0% | | Starter Rate | £12,571 - £14,876 | 19% | | Basic Rate | £14,877 - £26,561 | 20% | | Intermediate Rate | £26,562 - £43,662 | 21% | | Higher Rate | £43,663 - £75,000 | 42% | | Advanced Rate | £75,001 - £125,140 | 45% | | Top Rate | Above £125,140 | 48% |

Compare this to England's simple 20% (up to £50,270), 40% and 45% structure.

Crucial Rule: Dividends use UK Bands

The Scotland Act allows the Scottish Parliament to set rates on earned income (salary, pension, rental). It does NOT devolve power over savings or dividend income.

This is critical for directors:

• Your Salary is taxed at Scottish Rates (19% - 48%).
• Your Dividends are taxed at UK Rates (8.75% - 39.35%).

The "Hybrid" Allowances Problem

Even though dividends are UK-taxed, your Salary uses up the band capacity. This creates a complex interaction.

Example: £12,570 Salary in Scotland

If you take the standard £12,570 salary:

1. Salary Tax: £0 (Covered by Personal Allowance).
2. Band Usage: You have used £12,570 of the UK Basic Rate Band (£50,270).
3. Remaining Basic Rate for Dividends: £50,270 - £12,570 = £37,700.

So, for the typical "Low Salary, High Dividend" director, being in Scotland makes no difference to your total tax bill regarding the Basic Rate limit, because the UK threshold (£50,270) still dictates when Higher Rate Dividend Tax (33.75%) kicks in.

Where Scotland Bites: High Earners

If you pay yourself a high salary (e.g., inside IR35 or umbrella):

• You will pay 42% tax above £43,662 (vs 40% above £50,270 in England).
• You will pay 48% tax above £125,140 (vs 45%).

Optimal Strategy for Scottish Directors

The advice remains largely consistent with the rest of the UK:

1. Keep Salary Low: £12,570 minimizes Income Tax (0%) and just touches the NIC threshold.
2. Take Dividends: Since these rely on UK bands, you avoid the higher Scottish intermediate/higher rates.
3. Watch the Thresholds: Be aware that while your dividend tax is UK-based, your status as a "Scottish Taxpayer" helps fund public services differently.

Disclaimer: Check your tax code. If it starts with 'S', these rules apply.