The Scottish Government has given its biggest hint yet that it may need to reconsider tax plans if Jeremy Hunt uses his budget for a series of pre-election giveaways. 

The Chancellor confirmed over Christmas that he would set out the UK Government’s tax and spending plans on 6 March.

Speaking yesterday, as a 2% cut in national insurance came into force, he said he wanted to “go further” if he could afford to do so.

READ MORE: Scottish Budget: Shona Robison hikes taxes for high earners

In his bid for the leadership of the Conservative Party, Rishi Sunak repeatedly promised to reduce the basic rate of income tax, and with his party languishing behind Labour in the polls, he is under pressure from his backbenchers to keep to his word.

There has been some suggestion his Chancellor could cut 1p or 2p off the basic rate of income tax, or that he could raise the thresholds for the basic and higher rates.

Doing so would significantly increase the divergence between Scotland and England and could lead to behavioural changes, where high earners work fewer hours, pay a bit more into their pension, or move away from Scotland.

Joanne Walker, a technical officer for the Chartered Institute of Taxation (CIOT) Low Incomes Tax Reform Group, told The Herald on Sunday, there was “already some concern about the increase of tax burdens on Scottish taxpayers compared to those in the rest of the UK.“

The Herald:

Last month in Holyrood, Shona Robison set out her tax and spending plans including a new 45% rate which will see Scots earning between £75,000 and £125,140 pay up to £5,231.81 more than someone on the same salary in other parts of the UK in 2024/25.

There was also a hike in the top rate of tax from 47p to 48p in the pound.

However, the Scottish Fiscal Commission has already warned that behavioural responses will have an impact on the money taken in by the government.

In their forecasts, released alongside the budget, the independent body said the new 45% band should raise £147m, but when behavioural changes are taken into consideration, the yield will drop by around 59% to just £74m.

The increase in the top rate should bring in £53m but they forecast St Andrew’s House will take just £8m.

It is likely that any further divergence would only hamper the tax take further. 

READ MORE: Scottish top rate income tax hike to raise just £8m

Ms Walker told The Herald on Sunday: “If the UK Government lowers the basic rate of income tax, the slight tax advantage that Scottish taxpayers with income less than around £28,000 currently enjoy will be eroded.

“Moreover, higher up the income scale, the gap between the level of tax paid by Scottish taxpayers and those in the rest of the UK will widen further.

“If the UK government decides to increase the threshold at which people start to pay higher rate tax, this will also increase divergence with Scotland."

Ms Walker said those taxpayers in Scotland with income falling between the Scottish and UK higher rate thresholds already pay a "significantly higher marginal rate of tax on that slice of income compared to those in the rest of the UK"

"So increasing this gap could heighten concerns about possible behavioural changes," she added.

"Scottish employees may be more likely to pay more into their pension or work less. Scottish small business owners, e.g. sole traders, may be more inclined to incorporate and operate as limited companies to make the most of corporation and dividend tax rates which are set at a UK-wide level.

“There is also the possibility of some higher earners leaving Scotland altogether, while other workers may be deterred from moving to Scotland.”

READ MORE: Anger as Scottish budget widens cross-border tax gap and cuts services

Ms Walker said the timescale for any response from the Scottish Government to the Chancellor’s budget would be “very tight.”

She said: The Scottish Parliament must pass a Scottish Rate Resolution setting the rates for the tax year 2024/25 before the start of the tax year (6 April 2024).

“It is not possible to amend a Scottish Rate Resolution mid-tax year. This will leave the Scottish Parliament with little time to consider the implications of any UK Government announcement for the Scottish Budget that could influence their decision as to whether or not to respond.”

A Scottish Government spokesperson said: “Evidence of taxpayer behaviour is an essential part of tax policy decisions and the Scottish Government continues to work with stakeholders such as HMRC to develop the evidence base on this subject.

“People base their decisions on where to live and work on a wide range of factors, not just the tax they will pay.

"Those who call Scotland home enjoy a range of support not available throughout the UK, such as the Scottish Child Payment, free prescriptions and free access to higher education.

“Scottish Ministers await the details of UK Government tax decisions and will consider their impact if and when they are announced.”