HM Revenue and Customs (HMRC) has published its annual report for 2026 on the administration of Scottish Income Tax, revealing that the cost of running the devolved system was £0.50 million for the 2025-26 tax year while taxpayer numbers remain above three million.
The report, released on 22 September 2026, confirms that HMRC identified 3,036,400 Scottish taxpayers during the 2024-25 tax year. This data is critical for the Scottish Government’s budget, as revenue from non-savings and non-dividend income for those taxpayers reached £18.6 billion in the same period.
For the 2025-26 tax year, the administrative costs for operating the system were £0.50 million.
Identifying Scottish Taxpayers
A central part of the report focuses on how HMRC ensures people are paying the correct rate of tax based on their residency. In the UK’s devolved system, an individual’s status as a Scottish taxpayer is determined by where their main place of residence is located, rather than where they work.
HMRC estimates that its residency identification remains highly accurate, with a success rate of between 98% and 99%. To maintain this level of precision, the department conducted a third-party data assurance exercise, which included sending 5,800 letters to individuals to verify their residency status.
For most employees, their status is visible on their payslip via their tax code. Scottish taxpayers are assigned an ‘S’ prefix (such as S1257L), which instructs employers to deduct tax according to the bands set by the Scottish Parliament rather than those used in the rest of the UK.
Tax Rates and Revenue Reconciliation
The 2025-26 tax year saw adjustments to the devolved tax bands. Under the current structure, Scottish taxpayers pay income tax according to the rates and thresholds set by the Scottish Parliament, which differ from those used in the rest of the UK.
Because Income Tax is collected throughout the year but only finalised after the year ends, a reconciliation process is required. This involves adjusting the Scottish Budget based on the difference between the initial forecasts and the actual “outturn” revenue.
The Scottish Government reimburses HMRC for the net additional costs incurred in administering the devolved tax. These costs cover IT system changes, compliance work to ensure taxpayers are correctly categorised, and the communication of rate changes to the public and employers across the UK.
