What does chancellor Rachel Reeves' Budget mean for Scotland?

The build-up to Rachel Reeves’ Budget was marred by weeks of confusion and speculation.

Then the Office for Budget Responsibility published its growth forecast in error ahead of the Chancellor’s statement to the House of Commons on Wednesday – a move that goes against tradition.

Reeves described that blunder as “deeply disappointing”.

But all that aside, what did the Budget actually contain and what does it mean for millions of people across the country?

STV News breaks down the key announcements and examines the implications for people living in Scotland.

What is happening to tax thresholds?

The UK Government sets tax thresholds, but the Scottish Government sets its own rates and bands for income tax.

In her Budget, Reeves said income tax thresholds will be frozen until April 2031, meaning more people will pay higher rates

The freeze in tax thresholds will result in 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income tax payers in 2029/30, raking in about £8bn for the Exchequer.

The thresholds were frozen in 2021 when Rishi Sunak was chancellor, and were due to end in 2028.

The extension of the freeze for another two years until 2030 is expected to raise the Treasury £7.5bn a year.

But it will mean more people are dragged into paying tax for the first time or shifted into a higher rate as their wages go up.

Other personal tax changes include £4.7bn through charging national insurance on salary-sacrificed pension contributions, and £2.1bn through increasing tax rates on dividends, property and savings income by two percentage points.

Reeves said she would not increase National Insurance, income tax or VAT.

Will the economy grow in the coming years?

The Office for Budget Responsibility (OBR) forecast gross domestic product (GDP) would grow by 1.5% this year, an increase from its earlier 1% forecast.

But it downgraded growth in 2026 from 1.9% to 1.4%, in 2027 from 1.8% to 1.5%, in 2028 from 1.7% to 1.5% and in 2029 from 1.8% to 1.5%.

Reeves said “borrowing will fall as a share of GDP in every year of this forecast” and the amount of headroom against the UK Government’s targets will double to £21.7bn, “meeting our stability rule and meeting it a year early”.

Two-child benefit cap

Reeves said the two-child benefit cap will be scrapped from April, at an estimated cost of £3bn by 2029-30.

The Scottish Government already has plans to mitigate any changes to the two-child benefit cap, with a new payment that will open for applications next March.

But there are now questions around whether that will go ahead following today’s announcement.

Reeves said: “We on this side of the House do not believe that the solution to a broken welfare system is to punish the most vulnerable children.”

More than 1.5 million children are currently living in households affected by the two-child limit, which is around one in nine children in the UK.

It is estimated that scrapping the cap could lift 350,000 children out of poverty and reduce the depth of poverty for a further 800,000 children.

What other measures were there for Scotland?

The sun shines over the waterfront at Kirkcaldy during high tide. iStock

MPs were told £820m will be allocated to Scotland through the Barnett Formula. Northern Ireland will receive £370m, while Wales will get £505m.

Scotland’s funding from the UK Treasury – known as the block grant – is adjusted to reflect spending on devolved areas like health and education in England.

The calculation takes into account Scotland’s population alongside other key factors. Where things get most complex is welfare, with responsibilities split between Westminster and Holyrood.

Low-carbon technologies in Grangemouth, where an oil refinery closed earlier this year, will receive £14m backing, while there was also money announced for Inverclyde and Fife.

The chancellor told the Commons: “In Scotland, I’m committing over £14m for low-carbon technologies in Grangemouth, £20m to renew infrastructure at Inchgreen in Inverclyde, and £20m to redevelop Kirkcaldy town centre and seafront, with construction starting next year.

Pensions and savings

National Insurance will be charged on salary-sacrificed pension contributions above an annual £2,000 threshold from April 2029, according to the OBR.

Salary sacrifice enables people to maintain their take-home pay, as people end up paying lower national insurance (NI) contributions.

There are also NI advantages for employers, helping them to offer more generous workplace benefits.

Meanwhile, the annual cash ISA limit will be reduced to £12,000. The aim of reducing the limit from £20,000 is to encourage more people to invest their money in stocks and shares instead.

Fuel duty

There have been shortages at petrol stations. iStock

Reeves said the 5p per litre cut in duty introduced by the Conservative government in March 2022 would only be extended until September 2026.

It would be “reversed through a staggered approach”, the OBR said.

From April 2027, the UK Government has stated that fuel duty rates will be increased annually by the RPI measure of inflation, the document said.

Fuel duty has not risen since April 2010. Before the introduction of the 5p per litre cut, fuel duty had been frozen at 57.95p per litre since March 2011.

VAT is charged at 20% on top of the total price.

Gambling

MPs were told the tax on remote gaming will rise from 21% to 40%, and on online betting from 15% to 25%, while there are no changes for in-person gambling or horse racing.

She will also abolish bingo duty in April 2026

Electric vehicles

The Chancellor announced a new electric vehicle excise duty.

She said this will enable the government to double road maintenance funding in England, and offer a further £200m for a rollout of electric vehicle charging points.

Drivers of battery electric cars will be hit by a 3p per mile tax from April 2028, with the charge to rise annually with inflation, according to the OBR.

The Treasury faces a reduction in revenue from fuel duty, which raised just under £25bn in the 2024/25 financial year, as more drivers move from petrol or diesel cars to EVs.

Dr Mengfei Jiang, lecturer in finance at the University of Edinburgh, said: “The combination of higher EV subsidies and a potential per-mile road tax shows the government trying to balance two aims: encouraging the switch to electric vehicles while addressing the loss of fuel-duty revenues.

“The key question is whether the extra grant funding will actually lead to additional EV purchases. The environmental externalities, such as cleaner air and lower lifecycle emissions, only materialise if the funding persuades new buyers to switch, rather than subsidising decisions people would have made anyway.”

Milkshake tax

A sugar tax on pre-packaged milkshakes and lattes has been announced, ending an exemption for milk-based drinks from the existing tax.

The threshold for the tax will also be reduced to 4.5 grams of sugar per 100ml. The move will affect packaged milkshakes and coffees, but not drinks made in cafes and restaurants.