diff --git a/.changeset/fresh-lights-wink.md b/.changeset/fresh-lights-wink.md
new file mode 100644
index 00000000000..0021bfb009f
--- /dev/null
+++ b/.changeset/fresh-lights-wink.md
@@ -0,0 +1,5 @@
+---
+'@primer/react': patch
+---
+
+Fix extra padding on SelectPanel with groups
diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-Single-Select-dark-dimmed-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-Single-Select-dark-dimmed-modern-action-list--true-linux.png
index 7830a254f47..d672b63a446 100644
Binary files a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-Single-Select-dark-dimmed-modern-action-list--true-linux.png and b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-Single-Select-dark-dimmed-modern-action-list--true-linux.png differ
diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-colorblind-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-colorblind-linux.png
index 9ac90673201..766693d2c1e 100644
Binary files a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-colorblind-linux.png and b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-colorblind-linux.png differ
diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-colorblind-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-colorblind-modern-action-list--true-linux.png
index 42e27e9fbf6..de90279c556 100644
Binary files a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-colorblind-modern-action-list--true-linux.png and b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-colorblind-modern-action-list--true-linux.png differ
diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-dimmed-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-dimmed-linux.png
index de323640591..e1fd8ed56d3 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-dimmed-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-dimmed-modern-action-list--true-linux.png
index 9ea0165009e..3fde5059e65 100644
Binary files a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-dimmed-modern-action-list--true-linux.png and b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-dimmed-modern-action-list--true-linux.png differ
diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-high-contrast-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-high-contrast-linux.png
index 17b60b0f99b..198e4633039 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-high-contrast-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-high-contrast-modern-action-list--true-linux.png
index bdc41d673fe..7dfe319a78b 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-linux.png
index 9ac90673201..766693d2c1e 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-modern-action-list--true-linux.png
index 42e27e9fbf6..de90279c556 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-tritanopia-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-tritanopia-linux.png
index 9ac90673201..766693d2c1e 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-tritanopia-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-dark-tritanopia-modern-action-list--true-linux.png
index 42e27e9fbf6..de90279c556 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-light-high-contrast-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-light-high-contrast-linux.png
index aa88dca757a..65bc0ad68a4 100644
Binary files a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-light-high-contrast-linux.png and b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-light-high-contrast-linux.png differ
diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-light-high-contrast-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-light-high-contrast-modern-action-list--true-linux.png
index 7ec337e6482..aa29954d017 100644
Binary files a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-light-high-contrast-modern-action-list--true-linux.png and b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Footer-light-high-contrast-modern-action-list--true-linux.png differ
diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-colorblind-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-colorblind-modern-action-list--true-linux.png
index 02bddb41e1d..3b627543626 100644
Binary files a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-colorblind-modern-action-list--true-linux.png and b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-colorblind-modern-action-list--true-linux.png differ
diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-dimmed-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-dimmed-modern-action-list--true-linux.png
index 2f065a82c70..472456fa99f 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-high-contrast-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-high-contrast-modern-action-list--true-linux.png
index 4f1b9f563ff..cca1ccc071e 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-modern-action-list--true-linux.png
index 02bddb41e1d..3b627543626 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-tritanopia-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-dark-tritanopia-modern-action-list--true-linux.png
index 973cef5b98b..3b627543626 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-colorblind-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-colorblind-modern-action-list--true-linux.png
index 5e4bb5f6830..0516db99588 100644
Binary files a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-colorblind-modern-action-list--true-linux.png and b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-colorblind-modern-action-list--true-linux.png differ
diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-high-contrast-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-high-contrast-modern-action-list--true-linux.png
index 96b882c8fdb..2a53c1f3404 100644
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diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-modern-action-list--true-linux.png
index 5e4bb5f6830..0516db99588 100644
Binary files a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-modern-action-list--true-linux.png and b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-modern-action-list--true-linux.png differ
diff --git a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-tritanopia-modern-action-list--true-linux.png b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-tritanopia-modern-action-list--true-linux.png
index 5e4bb5f6830..0516db99588 100644
Binary files a/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-tritanopia-modern-action-list--true-linux.png and b/.playwright/snapshots/components/SelectPanel.test.ts-snapshots/SelectPanel-With-Groups-light-tritanopia-modern-action-list--true-linux.png differ
diff --git a/.playwright/snapshots/components/drafts/SelectPanel.test.ts-snapshots/drafts-SelectPanel-With-Warning-dark-high-contrast-linux.png b/.playwright/snapshots/components/drafts/SelectPanel.test.ts-snapshots/drafts-SelectPanel-With-Warning-dark-high-contrast-linux.png
index cef17d224cd..257b1e1ce2a 100644
Binary files a/.playwright/snapshots/components/drafts/SelectPanel.test.ts-snapshots/drafts-SelectPanel-With-Warning-dark-high-contrast-linux.png and b/.playwright/snapshots/components/drafts/SelectPanel.test.ts-snapshots/drafts-SelectPanel-With-Warning-dark-high-contrast-linux.png differ
diff --git a/packages/react/src/ActionList/ActionList.docs.json b/packages/react/src/ActionList/ActionList.docs.json
index 59bbc7ae805..4f941aa019e 100644
--- a/packages/react/src/ActionList/ActionList.docs.json
+++ b/packages/react/src/ActionList/ActionList.docs.json
@@ -15,9 +15,9 @@
     },
     {
       "name": "variant",
-      "type": "'inset' | 'full'",
+      "type": "'inset' | 'horizontal-inset' | 'full'",
       "defaultValue": "'inset'",
-      "description": "`inset` children are offset (vertically and horizontally) from list edges. `full` children are flush (vertically and horizontally) with list edges"
+      "description": "`inset` children are offset (vertically and/or horizontally) from list edges. `full` children are flush (vertically and horizontally) with list edges"
     },
     {
       "name": "selectionVariant",
diff --git a/packages/react/src/ActionList/ActionList.module.css b/packages/react/src/ActionList/ActionList.module.css
index 5e1d537708f..628ad90b55e 100644
--- a/packages/react/src/ActionList/ActionList.module.css
+++ b/packages/react/src/ActionList/ActionList.module.css
@@ -13,7 +13,9 @@
 
   &:where([data-variant='inset']) {
     padding-block: var(--base-size-8);
+  }
 
+  &:where([data-variant='inset'], [data-variant='horizontal-inset']) {
     /* this is only to match default experience */
     & .ActionListItem {
       margin-inline: var(--base-size-8);
diff --git a/packages/react/src/ActionList/ActionList.stories.tsx b/packages/react/src/ActionList/ActionList.stories.tsx
index 4a53aa290f5..df87f340b6c 100644
--- a/packages/react/src/ActionList/ActionList.stories.tsx
+++ b/packages/react/src/ActionList/ActionList.stories.tsx
@@ -45,7 +45,7 @@ Playground.argTypes = {
     control: {
       type: 'radio',
     },
-    options: ['inset', 'full'],
+    options: ['inset', 'horizontal-inset', 'full'],
   },
   selectionVariant: {
     control: {
diff --git a/packages/react/src/ActionList/Heading.module.css b/packages/react/src/ActionList/Heading.module.css
index fffceddac23..1a95511f228 100644
--- a/packages/react/src/ActionList/Heading.module.css
+++ b/packages/react/src/ActionList/Heading.module.css
@@ -5,7 +5,7 @@
     margin-inline-start: var(--base-size-8);
   }
 
-  &:where([data-list-variant='inset']) {
+  &:where([data-list-variant='inset'], [data-list-variant='horizontal-inset']) {
     /* stylelint-disable-next-line primer/spacing */
     margin-inline-start: calc(var(--control-medium-paddingInline-condensed) + var(--base-size-8));
   }
diff --git a/packages/react/src/ActionList/Item.tsx b/packages/react/src/ActionList/Item.tsx
index 8411f9ab3c8..2bf788f5837 100644
--- a/packages/react/src/ActionList/Item.tsx
+++ b/packages/react/src/ActionList/Item.tsx
@@ -193,7 +193,7 @@ export const Item = React.forwardRef<HTMLLIElement, ActionListItemProps>(
       paddingY: '6px', // custom value off the scale
       lineHeight: '16px',
       minHeight: 5,
-      marginX: listVariant === 'inset' ? 2 : 0,
+      marginX: listVariant === 'inset' || listVariant === 'horizontal-inset' ? 2 : 0,
       borderRadius: 2,
       transition: 'background 33.333ms linear',
       color: getVariantStyles(variant, disabled, inactive || loading).color,
@@ -217,7 +217,7 @@ export const Item = React.forwardRef<HTMLLIElement, ActionListItemProps>(
       appearance: 'none',
       background: 'unset',
       border: 'unset',
-      width: listVariant === 'inset' ? 'calc(100% - 16px)' : '100%',
+      width: listVariant === 'inset' || listVariant === 'horizontal-inset' ? 'calc(100% - 16px)' : '100%',
       fontFamily: 'unset',
       textAlign: 'unset',
       marginY: 'unset',
diff --git a/packages/react/src/ActionList/shared.ts b/packages/react/src/ActionList/shared.ts
index f3fd0cbb5a3..4b9e7606c6d 100644
--- a/packages/react/src/ActionList/shared.ts
+++ b/packages/react/src/ActionList/shared.ts
@@ -120,7 +120,7 @@ export type ActionListProps = React.PropsWithChildren<{
   /**
    * `inset` children are offset (vertically and horizontally) from `List`’s edges, `full` children are flush (vertically and horizontally) with `List` edges
    */
-  variant?: 'inset' | 'full'
+  variant?: 'inset' | 'horizontal-inset' | 'full'
   /**
    * Whether multiple Items or a single Item can be selected.
    */
diff --git a/packages/react/src/SelectPanel/SelectPanel.tsx b/packages/react/src/SelectPanel/SelectPanel.tsx
index 531696421e0..95b8130b2e4 100644
--- a/packages/react/src/SelectPanel/SelectPanel.tsx
+++ b/packages/react/src/SelectPanel/SelectPanel.tsx
@@ -608,6 +608,7 @@ function Panel({
             onInputRefChanged={onInputRefChanged}
             placeholderText={placeholderText}
             {...listProps}
+            variant={listProps.groupMetadata?.length ? 'horizontal-inset' : 'inset'}
             role="listbox"
             // browsers give aria-labelledby precedence over aria-label so we need to make sure
             // we don't accidentally override props.aria-label
diff --git a/packages/react/src/deprecated/ActionList/List.tsx b/packages/react/src/deprecated/ActionList/List.tsx
index 043e27000e8..52bcb0e5135 100644
--- a/packages/react/src/deprecated/ActionList/List.tsx
+++ b/packages/react/src/deprecated/ActionList/List.tsx
@@ -62,7 +62,7 @@ export interface ListPropsBase {
    * - `"inset"` - `List` children are offset (vertically and horizontally) from `List`’s edges
    * - `"full"` - `List` children are flush (vertically and horizontally) with `List` edges
    */
-  variant?: 'inset' | 'full'
+  variant?: 'inset' | 'horizontal-inset' | 'full'
 
   /**
    *  For `Item`s which can be selected, whether `multiple` `Item`s or a `single` `Item` can be selected