THE tax gap between Scotland and England is set to grow wider after Chancellor Philip Hammond announced tax breaks for first-time buyers and middle earners south of the border.

It is estimated that, if the Scottish Government does not respond with similar measures, then the move to raise the higher 40 per cent rate of income tax threshold next year from £45,000 to £46,350 for taxpayers in England, could see those in Scotland £670 worse off.

Also, it is calculated that the move by the Treasury to scrap stamp duty for first-time buyers on property up to £300,000 could see Scots in a similar position worse off by as much as £4,600 if the Land and Buildings Transaction Tax is not changed.

The Chancellor’s moves pile pressure on Derek Mackay, the Scottish Government’s Finance Secretary, ahead of his own Budget next month when he will lay out the Scottish Government’s plans for tax rates and thresholds.

A decision by Edinburgh earlier this year not to emulate an effective tax break in England by increasing the higher income tax rate from £43,000 to £45,000 led to political opponents describing Scotland as the “highest taxed part of the UK”.

The tax gap could grow even more as the Conservative Government has pledged to raise the higher rate to £50,000 by 2020.

Earlier this month, Nicola Sturgeon published a paper, meant to help discussion between Scotland’s political parties on the future of tax rates ahead of Budget negotiations. The First Minister said at the time: “We must consider if the time has come for those who earn the most to pay a modest amount more."

Lindsay Hayward, head of tax for PwC in Scotland, said the rise in the higher rate threshold to £46,350 would impact around 372,000 people in Scotland but that businesses and workers would not know the full extent of how it would hit their pockets until Mr Mackay delivered the Scottish Government’s Budget.

“The question to be asked is if the Scottish Government will change their plans based on today's announcement. There will be anxious eyes on the Scottish December Budget which - given the recent material shared by the Scottish Government - hints at potential further increases," she added.

Liz Cameron, Chief Executive of the Scottish Chambers of Commerce, warned: “When the Finance Secretary announces the Scottish Budget next month, the net result should not be to make Scotland the most highly taxed part of the UK.”

Donald Tosh, a director at wealth manager Brewin Dolphin, noted: “Over the next few years I would expect the spread between being a higher-rate taxpayer in Scotland and in the rest of the UK to widen further.”

Yet Mr Hammond’s headline announcement on stamp duty to help young people get on the housing ladder suffered an early blow when the Office for Budget Responsibility warned it would mainly benefit people who already owned homes by forcing up purchase prices.

Forecasting that the change, estimated to cost more than £3 billion by 2022/23, would result in as few as 3,500 additional home purchases a year, the UK Government’s independent forecaster said: "The main gainers from the policy are people who already own property, not the first-time buyers themselves."

However, Treasury sources insisted the move, which will come into force immediately, would benefit one million home-hunters by an average of £1,660 over five years.

They argued the move, which would also apply to the first £300,000 of homes worth up to half a million pounds, would be a welcome boost to first-time buyers south of the border with 95 per cent seeing a cut in the amount of stamp duty paid and 80 per cent paying none at all.

In his Budget speech, the Chancellor, who spoke of building 300,000 additional homes a year by the mid-2020s, declared: “When we say we will revive the home-owning dream in Britain, we mean it.”

Mr Hammond claimed his economic statement delivered for all parts of the UK, including boosting Scotland’s coffers by £2bn over four years, making progress on city deals for Tayside and Stirling, and providing more help for North Sea oil and gas decommissioning.

But a political flashpoint came over the Chancellor’s decision to exempt Scotland’s emergency services from future VAT payments.

To Tory cheers, he said: “I am getting used to the new experience of having my ear bent by my 13 Scottish Conservative colleagues, most recently on the issue of Scottish Police and Fire VAT.”

As Nationalist MPs gesticulated angrily, he went on: “The SNP knew the rules, they knew the consequences of introducing these bodies and they ploughed ahead anyway. My Scottish Conservative colleagues have persuaded me that the Scottish people should not lose out just because of the obstinacy of the SNP Government.”

The VAT refunds, which will start from next April, will cost the Treasury £210m over the next five years.

David Mundell, the Scottish Secretary, insisted: “This Budget demonstrates the UK Government is delivering for Scotland.”

But Ms Sturgeon dismissed the Chancellor’s £2bn pledge for Scotland as "smoke and mirrors".

She tweeted: "Firstly, it is spread over this and next three years. Second - and more important - more than half of the headline £2bn (£1.1bn) is in the form of financial transactions - money that can be used for limited purposes only and has to be repaid by @scotgov.”

The FM added: "Taking account of today's announced changes, next year's (2018/19) @scotgov revenue budget still facing real terms CUT of £239m - imposed by the UK Government."

Ian Blackford, the SNP leader at Westminster, branded the claim the Tories were responsible for forcing the U-turn on the VAT exemption “outrageous”.

“This was an act of vindictiveness by the UK Government in imposing it anyway and I should point out that the Scottish Conservatives backed the creation of a police force in Scotland and it was the UK Government that imposed this VAT on us.”

The Highland MP said he welcomed the fact the Treasury had “seen sense” but called on it to refund the £140m already paid out, adding: “The fight goes on.”

Mr Hammond’s room for manoeuvre with his second Budget was limited by grim economic forecasts from the OBR, which downgraded its predictions of GDP growth for each of the next five years as a result of the UK's poor productivity performance.

The OBR now expects to see GDP grow 1.5 per cent in 2017 - down from the two per cent forecast in March - 1.4 per cent in 2018, 1.3 per cent in both 2019 and 2020, before picking back up to 1.5 per cent in 2021, and 1.6 per cent in 2022.

The shadow of Brexit loomed large over the Budget statement with the Chancellor announcing another £3bn for withdrawal preparations on top of the £750m already announced.

While the economic figures are based on a variety of assumptions, the Brexit deal has not been figured in; when it materialises, the numbers will have to be significantly recalibrated.

Paul Johnson, Director of the Institute for Fiscal Studies, said the 1.4 per cent average annual growth forecast by the OBR over the next five years was "much worse than we have had over the last 60 or 70 years".

Although Mr Hammond had loosened the purse strings, he said Britain was still "not getting out of austerity", with most areas of public spending seeing cuts over the next few years.

The think-tank chief also suggested it looked increasingly unlikely the country’s books would be balanced by 2025 as planned.

Meanwhile, the Resolution Foundation made clear the economic squeeze was set to continue with disposable incomes on course to be £540 lower by 2023 than forecast in March.

The living standards think-tank said pay would be £1,000 lower and wages would not return to levels seen before the financial crash until the middle of the next decade.

Yet Treasury aides insisted Mr Hammond was confident of meeting this target and had not forfeited the right to the nickname "fiscal Phil" as his £25bn splurge was being funded from "headroom" he had built up in previous announcements.

However, the Chancellor was accused of planning a “fire-sale” of the public’s share in the Royal Bank of Scotland to fund most of his five-year spending spree.

The Exchequer is dusting off plans to re-privatise the taxpayer-backed bank by selling £15bn of its shares by 2023, representing some two-thirds of the public’s 72 per cent stake.

However, the move will see the Government take a hefty loss with shares languishing well below the average 502p a share price paid at during the 2008 and 2009 bail-out at around 271p at today's prices.

Mr Blackford, asked if the Government was indulging in a fire-sale of RBS shares, replied: “Of course, it is. Obviously, RBS has had a troubled time. For me, this is the wrong time to be looking at selling RBS shares. They’ve got to look forward to a period when the public, who invested through the Government in RBS, get a return on that investment.”

In a rowdy Commons, Mr Hammond told MPs the Budget laid the foundations for a "global Britain" after Brexit, "where talent and hard work are rewarded, where the dream of home ownership is a reality for all generations, a hub of enterprise and innovation, a beacon of creativity, a civilised and tolerant place that cares for the vulnerable and nurtures the talented, an outward looking, free-trading nation, a force for good in the world."

But Jeremy Corbyn condemned the Budget, saying it amounted to a "record of failure with a forecast of more to come".

The Labour leader predicted: “As the days go ahead and this Budget unravels, the reality will be a lot of people will be no better off and the misery many are in will be continuing."