Holyrood will be asked to vote today on the Scottish budget that will widen the tax gap between Scots and those living south of the border.

Higher earning Scots will on average be 2.1% poorer than those in England and Wales, equivalent to £2,590, according to the Institute of Fiscal Studies.

The poorest 10% will on average be £580 better off a year from April from benefit rises, lifting incomes by 4.6%.

The SNP Scottish Government, supported by the Green party, argues that its more progressive policy is fairer.

However, business leaders warn that continually eroding the take-home pay of higher earners will make it more difficult to retain and attract top talent to Scotland.

This view gained some support from Tom Wernham, a research economist at IFS and an author of the report.

He said: “With this group in particular, there is a risk that higher taxes will incentivise tax avoidance efforts, such as converting income into dividends – to which Scottish tax rates don’t apply – or even migrating across the border.

“There is a limit to how much further this strategy can be pushed. If the Scottish Government does want to raise more revenue from richer households, it may need to turn to other taxes under its control, such as council tax.”

Scotland has more tax bands and different rates to the rest of the UK. The higher tax rate is set to rise from 41p in the pound to 42p, whereas south of the border it is 40p. Meanwhile, while the highest earners will pay 47p (rest of UK: 45p).  

Anyone earning more than £28,000 will pay more income tax than if they lived in England or Wales.

Those earning £50,000 will face paying £1,550 extra while those earning £150,000 will be paying £3,900 more.

From April the higher threshold is remaining frozen at £43,663 (rest of UK :£50,271) while the threshold for the highest rate is being reduced to £125,140.

The IFS noted that benefit changes, such as the increase in the Scottish child payment were helping to lift the incomes of Scotland’s poorest households when compared with south of the border.

Chief executive of the Scottish Chambers of Commerce, Liz Cameron, said the tax rises put Scotland’s businesses and workers at a a clear disadvantage.

She said: “Considering the widespread labour shortages being faced by Scottish businesses already at this time, we must do more to incentivise, not disincentivise, the skilled workforce that we need.”

Tracy Black, Scotland director at the CBI, said that many firms are concerned about the growing income tax gap between Scotland and the rest of the UK.

She said: “We must be vigilant about policies that send the wrong signal about Scotland’s openness for business.”

Defending his tax plans, Deputy First Minister John Swinney said: “People base their decisions on where to live and work on a range of factors, including the quality and provision of public services, not just the tax they pay.

“We are taking a different, progressive path for Scotland and asking those who are able to contribute a little more to do so.

“People are able to access a wide range of services and benefits that go significantly beyond provision in other parts of the UK.”

Councils in Scotland will be exempt from land and buildings transaction tax (LBTT) when they buy properties for affordable housing under Scottish government plans.

A consultation launched yesterday includes proposals to offer the break to councils on LBTT and additional dwelling supplement for owners of more than one home.

Low understanding of income tax system

A survey has revealed a low level of understanding of who is responsible for income taxes in Scotland.

• Only one in five (20%) respondents correctly identified that income tax is a shared responsibility of the Scottish and UK parliaments. This is the lowest figure recorded since the survey was first conducted in 2018 (34%) and is a fall of seven points on the 27% recorded when the poll was last undertaken in 2021
• More than half (52%) incorrectly thought that the Scottish Parliament alone is responsible for setting income tax. This is the highest figure recorded since the survey began (2018: 41%) and an increase of nine points on 2021 (43%)

Sean Cockburn, chair of the Chartered Institute of Taxation’s Scottish Technical Committee, said: “The growing confusion among Scots over where income tax is set is concerning.

“Scots may be looking at the increasingly lively debate about levels of income tax and concluding that this means that power rests solely at Holyrood.

“The reality however is more complicated than that, as many important aspects of the income tax regime continue to be set on a UK wide basis, such as the amount of money someone can earn tax free and the amount of income tax that someone pays on their savings or dividend profits.

A lack of understanding of how the tax system works is not a uniquely Scottish issue, but increasing divergence between the Scottish and UK income tax regimes means it will be important to ensure taxpayers can more easily understand where responsibility and accountability lies”.

Who is responsible for income tax?

While the Scottish Parliament has the power to set rates and bands of income tax on non-savings, non-dividend income (i.e. income from a job, self-employment profits, pensions and rental income), a range of other income tax powers apply in Scotland that are set UK-wide.

They include things like setting the tax-free personal allowance, setting tax reliefs, collecting income tax and setting rates and bands of income tax paid on savings and dividends. National Insurance is also set on a UK-wide basis, and its rates and thresholds are tied to UK, not Scottish, tax rates.