John Swinney and Shona Robison have been urged to close the tax gap between Scotland and the rest of the UK.

Scotland’s financial sector has called on SNP ministers to rethink their income tax strategy and “begin changing course” to end a divergence with the rest of the UK.

The Scottish Government has targeted those on higher incomes with income tax rises to drum up more funding for public services - with those earning more than £29,000 paying more than people in the rest of the UK.

First Minister John Swinney and finance secretary Shona Robison | Andrew Milligan/PA Wire

SNP finance secretary Shona Robison will set out her government’s income tax policy for the 2025/25 financial year when she delivers her draft budget at Holyrood next Wednesday.

Scottish Financial Enterprise (SFE) has now called on the Scottish Government to actively address the growing divergence between Scotland and the rest of the UK.

The call comes after the Institute of Fiscal Studies (IFS) suggested recent increases in income tax rates by the Scottish Government may have reduced rather than increased the devolved tax take.

The IFS warned that “total revenue from income tax would be £570m lower in 2025–26 than last forecast” – with half of this due to a lower reconciliation payment than expected and the other half due to “lower in-year revenue forecasts”.

Scottish Financial Enterprise’s chief executive, Sandy Begbie, said: “SFE has consistently stressed the risk of income tax divergence shrinking the Scottish tax base. We have pursued an evidence-based approach on this issue which has now been vindicated by the Institute of Fiscal Studies.

Sandy Begbie is chief executive of Scottish Financial Enterprise. Picture: Graham Flack

“It is essential that the Scottish Government resists calls for even further income tax rises. It may be inconvenient for some, but the data strongly suggests that further tax rises would be counterproductive.

“The government must instead recognise that its divergence policy is not working and take action to begin changing course.”

He acknowledged that “divergence cannot be unpicked over night”, but added: “Bringing even some income tax rates more closely in line with the rest of the UK would be a step in the right direction and a clear signal that the Scottish Government recognises the concerns of business and its ability to grow, invest, and attract and retain talent.”

Scottish Conservative shadow finance secretary Craig Hoy backed the “common sense conclusion that the SNP government’s higher income tax levels are not working”.

Mr Hoy added: “The Scottish tax regime makes it harder to achieve economic growth and is discouraging skilled workers from coming to Scotland.

“As the Institute for Fiscal Studies recently said, higher rates of tax in Scotland have actually reduced the Scottish tax take, meaning there is less money to invest in public services.

“Labour’s tax-grab budget has only added to burden on Scottish households and businesses and it’s more important than ever that the SNP reverses its tax policies.”

Scottish Labour finance spokesperson, Michael Marra, said: “For too long the SNP has tried to use income tax hikes as a sticking plaster to cover for low growth and government waste, but it’s just not working.

“The SNP cannot make the same mistake again – it must rule out any further hikes to income tax in this year’s budget.

“The UK Labour government has ended austerity and delivered record levels of funding for Scotland – it is now up to the SNP to spend this wisely and deliver a change in direction.”

A Scottish Government spokesperson said: “Scotland’s tax policies are grounded in evidence and carefully balance the need to raise revenue with the impacts on taxpayers and the economy.

“Our tax base continues to grow strongly, with data from the RTI PAYE system showing Scotland experienced faster earnings and tax per head growth than the rest of the UK in both 2022-23 and 2023-24.”

The appeal comes amid new fears over the sustainability of the finances of local councils ahead of next week’s budget.

New research from the Local Government Information Unit (LGIU) Scotland has revealed that 70 per cent of all councils believe they will be unable to pass a balanced budget within the next five years without an immediate overhaul.

The study found councils are taking every measure available to balance their budgets including raising council tax, reducing expenditure and increasing fees and charges, sharing services and engaging in commercial activity.

The Scottish Government is yet to confirm whether councils will be able to raise council tax or if it will be capped - although there is unlikely to be a repeat of last year’s controversial council tax freeze. Local government body Cosla has called for councils to be able to hike council tax by an unlimited amount.

Many councils believe the measures available will still not be enough to prevent the risk of an unbalanced budget.

Jonathan Carr-West, chief executive of LGIU Scotland, said the research made for “grim reading”.

He added: “We are nearing the point of no return. The report paints a picture of a system under continual and significant strain, with the scale of financial pressures increasing from 2023.

“Local government finances in Scotland are hanging by a thread. However, the thread has not yet broken. Today’s report delivers a stark warning that councils are in a precarious financial position and there is not much time until the sector starts to see potentially catastrophic consequences.

“Change is urgently needed. Councils will soon be unable to balance their budgets, meet their statutory duties, or provide for their communities. We need to change course now before it is too late.”

A Scottish Government spokesperson said: “The Scottish Government has made available record funding of over £14 billion to councils this year, a real-terms increase on last year, with almost £1 billion included in councils’ general revenue grant as part of our commitment to the Verity House Agreement.

“This agreement is already helping to deliver on community priorities, with joint work between the Scottish Government and COSLA on local government pay, second homes and support for foster and kinship carers.

“Ministers are invested in delivering fairer, more inclusive, and fiscally sustainable forms of local taxation, and continue to work in partnership with COSLA to explore changes to council tax.”

In a speech in Edinburgh today, First Minister John Swinney will pledge his government will prioritise funding and investment for his four priorities – eradicating child poverty, growing the economy, investing in public services and tackling the climate emergency.

The First Minister is expected to warn that “discussions and the public discourse are dominated by surface solutions, because they are the few that can gain consensus”.

He is expected to add: “The temptation then arises to throw money and strategies at a problem, or simply to find someone to blame for it, because the hard work of finding true consensus, of peer reviewing ideas in good faith, can feel unrealistic in our increasingly polarised reality.

“We must maintain enough hope and energy to work together, to understand the root causes and the complexity of problems and to find the right solutions.

“These solutions may not always be quick or easy – but that does not make them any less necessary. This is the approach that people should expect from a Swinney government.”

Why SNP has been told to 'begin changing course' and end tax divergence with UK

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