HOLYROOD’S budget could suffer if Scottish ministers follow the UK’s lead and cut the income tax threshold for top earners, a leading economic thinktank has warned. 

The Institute for Fiscal Studies (IFS) told MSPs yesterday that the resulting adjustment to the block grant could more than offset any potential gains as Scotland has relatively fewer big earners than the rest of the UK.

Green MSP Ross Greer called it one of the “perverse incentives” in the fiscal framework that governs the tax and spending relationship between Edinburgh and London.

Chancellor Jeremy Hunt announced last month that he was cutting the point at which top earners pay the 45p rate of income tax outside Scotland from £150,000 to £125,000 from next April.

The change is expected to raise around £800million from those already paying the 45p rate.

In Scotland, where income tax is largely devolved, the top threshold is also £150,000, although the rate 46p.

After Mr Hunt’s budget, SNP acting finance secretary John Swinney hinted he was likely to follow suit in the Scottish Budget for 2023/24, which is out next week.

He would target “those who can best afford it”, he said. 

But the IFS evidence suggests he now faces an ugly political choice between setting a more generous rate for the rich than the Tories and losing money in the long run. 

This is because the complex formula used to adjust the annual Treasury block grant to Holyrood would see it cut by more than the extra raised by the tax change. 

Mr Phillips told Holyrood’s finance committee: “The forecast is for this [new £125,000 threshold] to raise about £800m across England, Northern Ireland and Wales.

“I would expect a similar measure in Scotland, given the taxable capacity of Scotland, to raise probably around £30 to £40m, off the top of my head.

“Scotland actually could lose from this policy overall though because the block grant adjustment will go up, reflecting the percentage change in this in the rest of the UK.

“Because there are more higher income earners in England, particularly in London and the South East, there will be a bigger percentage change in revenues in England and Northern Ireland [and Wales] than you’ll get from the same tax change in Scotland.

“So if Scotland was to follow suit with this tax change, I think Scotland might lose a few million pounds because the block grant adjustment will go up by more than the tax revenues in Scotland.”

Mr Greer,  a committee member, replied: “I think you’ve hit on one of the key areas that the review of the fiscal framework needs to consider there - the perverse incentives that it currently creates.”