Scottish Tax Changes 2025/26: What Small Business Owners Need to Know

As a small business owner in Scotland, staying on top of tax updates is essential, not just for
compliance, but for planning ahead and keeping your business financially healthy.

The 2025/26 tax year introduces a number of important changes, especially for sole traders,
company directors, and small limited companies. In this post, we’ll break down what’s
changing and how you can prepare.

Note: Always seek tailored advice from an accountant or tax adviser, especially if your
Circumstances are more complex.

1. New Scottish Income Tax Bands for 2025/26

The Scottish Government has adjusted tax bands and rates again this year. Here's a simplified
breakdown for earned income (e.g. salary, self-employed profits):

Band                           Rate            Income Range
Starter                      19%              £12,571 – £14,876
Basic                          20%               £14,877 – £26,561
Intermediate           21%             £26,562 – £43,662
Higher                       42%              £43,663 – £75,000
Advanced (new)    45%             £75,001 – £125,140
Top                             48%               £125,141+

If you’re a sole trader, your profits will be taxed according to these bands (after your
personal allowance).

2. What If You’re a Company Director?

If you’re the director of a limited company, you may pay yourself through a mix of salary and
dividends. It’s more tax-efficient, but you’ll still need to be mindful of:

• PAYE thresholds for salaries
• Dividend tax rates, which apply UK-wide
• Corporation Tax, which remains at 25% for profits above £50,000 (though smaller
  Companies benefit from marginal relief.)

It’s wise to reassess your salary/dividend mix annually based on the latest tax bands.

3. National Insurance Update

For employee earnings, National Insurance (NI) has been reduced in the UK from previous
years:

• Class 1 employee rate is now 8% (for earnings above £12,570)
• Class 2 (self-employed flat rate) is being scrapped from April 2025
• Class 4 (self-employed profits) is dropping to 6%

4. Making Tax Digital (MTD) for Income Tax

From April 2026, MTD for Income Tax will become mandatory for self-employed
individuals and landlords earning over £50,000, with the threshold dropping to £30,000 in
2027. While not a 2025 change, it’s essential to start preparing now.

Using cloud accounting software like Xero, FreeAgent, or QuickBooks can make this
transition smoother.

5. VAT & Thresholds

The VAT registration threshold remains at £90,000 for 2025/26. If your annual turnover
exceeds this, you must register for VAT. Staying just below this limit? Keep a close eye on
monthly turnover to avoid a surprise registration.

6. What You Can Do Now

• Speak to your accountant about tax planning
• Review your salary/dividend mix (if a director)
• Move to cloud-based bookkeeping tools
• Track your earnings against thresholds
• Budget for changes to income and NI

How Clyde Offices Can Help

Our virtual assistant service can take care of admin, invoicing, and email follow-ups—so
you can focus on running your business. Our telephone answering service ensures you never
miss calls from clients or HMRC. And with a virtual business address, you’ll always have a
professional front, even from home.