Chancellor Rachel Reeves has been urged by left-leaning thinktank, the Resolution Foundation, to cut employee national insurance by 2p and raise income tax by the same amount in her autumn budget – a move that would raise billions in revenue while protecting workers’ pay packets and save the Treasury up to £30bn.
A hike in income tax would raise more because it applies to a wider group of taxpayers than employee national insurance, including pensioners, landlords and self-employed people.
Cutting national insurance would be a decision made by the Chancellor in Westminster and would apply across the UK, including Scotland. However, it would be up to the Scottish National Party to decide in its January budget whether to adjust income tax rates to align with those in England and Northern Ireland.
While the thinktank said it expected devolved governments in Cardiff and Edinburgh to follow suit, there is no guarantee they would. That has fuelled concern among Scotland’s Labour MPs that Reeves could inadvertently hand the SNP an advantage if John Swinney’s party keeps taxes lower than those in England ahead of May’s Holyrood elections.
‘A tartan tax trap’
“Are the SNP just going to keep income rates artificially low and say to voters, ‘Look, you’re the least taxed part of the UK under the SNP’? That would be quite tempting, wouldn’t it? There’s a tartan tax trap there: ‘stick with me and save more money’,” a Labour MP told The i Paper.
“The SNP could do a smoke and mirrors trick and hold taxes artificially low. If [former SNP leader] Alex Salmond was around that’s what he’d do. He’d take the risk.”
While a late October poll from the IPPR Scotland think tank placed the SNP as the largest party at the May 2026 elections, it fell ten seats short of the 65-seat majority needed to control Parliament.
The same survey puts Reform on course to return 22 MSPs and Labour 19. In Westminster, Labour MPs are waiting to see the outcome of elections in Cardiff, Edinburgh and across England in May before they decide whether to move against Sir Keir Starmer’s leadership.
But Swinney, the SNP leader in Edinburgh, may not gain the political advantage Labour MPs fear. According to a recent analysis by the Fraser of Allander Institute, Scotland’s leading economic think tank, a 2p rise in the basic rate of income tax by the Chancellor would cut around £1bn from Scottish public spending.
That’s because any increase in UK income tax revenues would be offset by a corresponding reduction in the block grant Scotland receives each year from the Treasury; meaning Scottish voters would see no additional benefit from the extra tax.
A ‘political dilemma’ for the SNP
Raising income tax will have a “knock-on effect” in Scotland because the Scottish government will need to decide whether or not follow suit in its January Budget, Joao Sousa, Deputy Director of the Fraser of Allander Institute told The i Paper.
“As the Scottish Government only gets to keep revenue from income tax over above how much would be raised were it not devolved, it loses revenue which presents a political dilemma for the SNP.
“It must then weigh up whether to no longer have as high a level of income tax relative to the rest of the UK ahead of May’s elections, but doing so would require it cutting spending on public services – perhaps by as much as a £1bn if Rachel Reeves puts an extra 2p on the basic rate,” he added.
If Reeves presses ahead with the plan in the Budget, Scottish Labour leader Anas Sarwar would be able to argue that Labour had made taxpayers better off. But if the SNP doesn’t raise income tax in January, both Labour and the SNP would try to take credit for that outcome.
For the SNP which has banked on high taxation and high spending to provide free prescriptions, free university tuition, the expansion of free nursery places and the removal of peak rail fares, the suggestion of spending cuts could be anathema.
If Swinney does not secure a majority, it would make governing difficult, with the SNP forced to rely on other parties to pass legislation and budgets.
On Tuesday, SNP Finance Secretary, Shona Robison, said UK tax changes could have “a massive impact” on Scotland’s public services. Her Government did not want to hike rates to plug a funding shortfall, she added, but did not rule out the possibility.
“We will look through all of the options that we can take,” she told BBC Scotland “to make sure that we are fair to taxpayers but also that we sustain public services.”
Although Westminster determines the personal allowance, which is the income threshold for income tax, the Scottish government has the authority to establish its own tax bands and rates.
SNP ministers have used these capabilities to create, what they claim, is a more progressive framework. Critics contend Scotland’s income tax system, which has seven brackets compared to England’s four, is more complex and disadvantages middle and high-income earners.
Although Reeves pledged during last year’s general election not to raise income tax, VAT, or National Insurance, she used a speech on Tuesday to argue that inflation, trade tariffs, weak productivity, Brexit and higher defence spending have changed the economic landscape – laying the groundwork for widely anticipated tax increases.
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