Nicola Sturgeon may retain the highest income tax band in the UK amid warnings that top executives will flee the country and the Scottish parliament’s budget forecasters telling her that it provides very little revenue.

The First Minister criticised the Chancellor for rewarding the rich by scrapping the 45p Additional Rate tax band south of the border, leaving Scotland with a 46p rate for the highest earners.

She hit back at those who called for her government to match the Chancellor’s tax changes, arguing that they heaped benefits on the wealthy and that the package of measures sent the markets into a tailspin.

She tweeted: “A UK gov ‘budget’ that benefits wealthiest over poor/middle income earners, tanks the £, pushes up the cost of (v substantial) borrowing, and is castigated as reckless. And yet Tories (& right wing commentators) will demand that @scotgov blindly follows suit. Mmm…”

Labour leader Sir Keir Starmer today said that he would reintroduce the 45p rate on earnings of more than £150,000, but promised to maintain the basic rate, which was cut this week from 20p to 19p.

However, the Fraser of Allander Institute said the Scottish Government is in a “difficult political position”.

In its response to the Chancellor’s Fiscal Event, the Fraser of Allander says the Scottish Fiscal Commission, which provides independent forecasts on tax and the economy, has identified only 22,000 individuals in Scotland who pay the Additional Rate on earnings above £150,000.

It says the SFC “is likely to forecast that abolition of the Additional Rate wouldn’t be extremely costly in revenue terms”.

The Fraser of Allander adds that “charging them a few pence less tax on their income above £150k might not have a significant affect in aggregate, particularly if it is assumed, as the SFC will, that the tax reduction will induce some element of a positive behavioural response.

“The Additional Rate policy therefore puts the Scottish Government in a difficult political position. If it retains the Additional Rate it will be accused of undermining the ‘competitiveness’ of the Scottish economy, for little direct revenue gain.”

It points out that without any changes to existing policy, a taxpayer with an income of £200,000 would face an additional £5,900 in income tax liabilities in Scotland compared to an equivalent taxpayer in England.

“But abolition of the Additional Rate would provide a significant tax cut for the highest income 0.5% of the Scottish adult population. An individual with income of £200,000 would be better off to the tune of £2,500 if the Additional Rate is abolished.

“The regressivity [tax decreases for those on higher incomes] of a cut to the top rate in Scotland is difficult to reconcile with the Scottish Government’s aspirations for progressivity [increases based on the amount earned],”

Apart from tackling the top rate, the Scottish government could mirror UK tax cuts with tax cuts of its own, says the Fraser of Allander.

“It could for example decide to reduce the starter, basic and intermediate rates by 1p. This would broadly retain the difference in tax liability for individuals between Scotland and rUK at current levels.

“It would allow the Scottish Government to retain its treasured mantra that ‘the lowest income half of Scottish taxpayers pay less tax than they would in rUK’.

“But such a policy would cost the Scottish government around £400m in foregone revenues.”

Ms Sturgeon’s unambiguous attack on the Chancellor’s statement, leaves her having to defend her government’s high tax regime, or make an embarrassing u-turn by falling into line with the Treasury.

A number of former and current economic advisers to the Scottish government this weekend have warned that the country risks high earners and wealth creators fleeing the country unless the SNP matches Conservatives’ tax changes.

Sir George Mathewson, the former Royal Bank of Scotland chair and CEO, Professor Sir John Kay, and the industrialist Jim McColl served on the Scottish government’s council of economic advisers and said Scotland had been left in a no-win situation.

Mr McColl said: “Westminster is making the UK attractive. We need to make Scotland an attractive destination.”

Another former banker, Benny Higgins, who is also the author of several Scottish government reports on business growth and the establishment of the Scottish National Investment Bank, said: “A 1p gap may be seen by me and my peers as tolerable, but a 6p gap would be different”.

Douglas McWilliams, a leading economist and deputy chairman of the Centre for Economics and Business Research has said “it would be realistic to assume about 20% of top-rate taxpayers could move south”.

He said the Scottish government “will almost certainly lose more revenue if it doesn’t match the tax cut than it would gain from keeping the top tax rate”.

Meanwhile, SNP Westminster Leader, Ian Blackford, is demanding that the UK Parliament is recalled so that Liz Truss and Kwasi Kwarteng can be “held to account for the depth of the damage caused by the inequality and incompetence of the budget which has triggered a major financial crisis.”

Friday’s statement was followed by sharp falls in the FTSE100 and the pound, and sent bond yields for borrowing soaring as the measures were seen as stoking inflation and the potential for even steeper interest rate rises.

However, a recall is unlikely with the government having a hefty majority in the Commons and with the party conference season now underway.

Budget analysis: how tax became the new battleground for the union

Summary of the tax changes and how they affect Scotland

Income tax and property tax divergence widens

The 1p cut in the basic rate of income tax in England, Wales and Northern Ireland will be brought forward by a year to next April, a tax cut for over 31m people who will benefit on average by £170 more per year. Basic rate taxpayers will be £130 better off, and higher rate taxpayers will be £360 better off.

The Chancellor also abolished the additional rate of 45% on earnings above £150,000. In its place will be a single higher rate of income tax of 40%.

The policy removes the previous top rate tax, which was higher than countries such as Norway, US and Italy.

Moving to three rates (0%, 20% and 40%) will result in one of the simpler rate structures in the OECD. The controversial off-payroll IR35 rules for contractors will be repealed.

The income tax cuts do not apply in Scotland which has different thresholds. This will put pressure on the Scottish Government to follow suit, or have a higher tax regime than the rest of the UK.

New analysis here shows Mr Kwarteng’s changes will mean no Scots will pay less tax than anyone in the UK and some will pay considerably more.

Ahead of any possible changes in Scotland, the 19% income tax rate will only apply to salaries between £12,571 and £14,732, increasing to 20% for those earning £14,733 to £25,688 and then 21% to £43,662.

Susie Walker, head of tax at Johnston Carmichael, said: “It will be interesting to see how Holyrood reacts. Will there be further divergence between North and South of the Border? And if there is, what will the impact be on our talent pipeline? Key sectors including tech are already struggling to recruit.” 

Stamp duty

The chancellor announced a cut to the stamp duty tax paid on buying a home in England and Northern Ireland. This raises the threshold of how much a property has to cost before the duty is paid to £250,000 and for first time buyers it rises from £300,000 to £425,000.

About 200,000 more people will be taken out of paying stamp duty altogether.

Through Scotland’s land and buildings transaction tax a 2% charge is in place for homes priced between £145,000 and £250,000, rising to 5% between £250,001 and £325,000. A 10% rate is due for purchases between £325,001 and £750,000 while anything from £750,001 attracts a 12% charge.

Under the agreed Fiscal Framework, the Scottish Government is expected to have more than £460 million of additional funding across the Spending Review 2021 period as a result of these rate cuts to allocate as it sees fit.

Alasdair Humphery, head of Scotland at property agent JLL said:  “Plans to help both households and businesses alike with their bills will be welcomed across the UK but we can’t afford to lose sight of the need to address inequalities here in Scotland.  

Jane Wood, the chief executive of the industry body Homes for Scotland, said: “At a time when Scotland has an undersupply of housing approaching 100,000 homes, this is highly concerning in the context of attracting investment and ensuring that those delivering the homes that our country desperately needs are on a level playing field with their counterparts south of the border.”

Business and consumer tax cuts

Under the previous UK government’s plans, the rate of corporation tax was to increase from 19% to 25% from April 2023 for firms making more than £250,000 profit, around 10% of actively trading companies.

Companies making between £50,000 and £250,000 were also due to face a rise, incrementally from 19% to 25% depending on how much profit a firm was making. 

The government has now cancelled this planned increase. Rather than rising to 25% from April 2023, the rate will remain at 19% for all firms, regardless of the amount of profit made.

Mr Kwarteng also scrapped the bankers’ bonus cap, arguing that it merely pushed up basic salaries and said he wanted to encourage top executives to locate in the UK.

Planned increases in duty rates for beer, cider and wine are also cancelled. Reforms to modernise alcohol duties will be taken forward to consultation.

There was some disappointment that he did not mention business rates or VAT which were seen as tools to achieve a quick solution to cutting business costs.

The 2017 and 2021 reforms to the controversial off-payroll working rules known as IR35 will be repealed, bringing some relief to contractors and employers.

However, Penny Simmons, legal director at Pinsent Masons, said the rules will still exist, only that contractors will once again be responsible for compliance and payment of tax.

“Businesses will remain exposed to tax risks by virtue of other tax rules and the corporate criminal tax offences – if they pay contractors off-payroll when they know that the contractors should be taxed as employees,” she said.

“The Chancellor has also said that they will keep compliance under review – the rules were changed because HMRC thought 90% of contractors weren’t applying the rules correctly – so if HMRC thinks this is still the case, we may well see further changes, albeit in a different form.

“Ultimately, although the initial reaction may be positive, there will likely be frustration amongst business regarding the significant amount of time and money that has been spent on compliance with the rules and there remains uncertainty regarding what might come next. It is also unclear what position HMRC will take when dealing with businesses who have inadvertently fallen foul of the rules in this interim period.”

Mr Kwarteng announced the re-introduction of VAT-free shopping for overseas visitors. Joss Croft, CEO at UKinbound, said “We are incredibly pleased that Government has listened to the tourism and retail industries and will be introducing a modern, digital VAT-free shopping scheme.”

The Annual Investment Allowance threshold has been permanently set at £1 million, rather than reverting to £200,000. This is a 100% capital allowance for qualifying expenditure on plant and machinery up to a specified annual limit and covers the investment needs of 99% of the UK’s businesses.

The EIS will continue and the government is expanding the Seed Enterprise Investment Scheme (SEIS) to help more UK start-ups raise higher levels of finance. This package will help over 2,000 start-up companies access finance.

The Chancellor confirmed the introduction of investment zones which will have tax benefits, no national insurance and easier planning rules.

He will allow freeports to convert to new tax-beneficial investment zones as part of a package of 30 measures to grow the UK economy.

Investment Zones will offer generous, targeted and time-limited tax cuts for businesses. Mr Kwarteng confirmed that discussions are under way with 38 towns and mayoral areas in England and that investment zones will also be delivered in Scotland, Wales and Northern Ireland, though it will require further negotiations with the devolved governments.

The zones will also benefit from further liberalised planning rules to release more land for housing and commercial development, and reforms to increase the speed of delivering development.