Scottish Income Tax and Businesses: Initial Evidence Review of Tax and Competitiveness

Fotnotes

1 Institute for Fiscal Studies, 2024. The government’s record on tax 2010–24 (last accessed: 1/07/2026)

2 BICS for August was collected between 7 July to 20 July 2025.

3 This reflects that business rates having risen as a main concern (from 3.4% to 8.2% while taxation as a main reason has fallen (from 9.0% to 7.0%). The UK (excluding micro businesses for comparability) has seen a similar change over the same period.

4 Scottish Government, 2026. Small Business Survey Scotland: 2024-2025 - gov.scot (last accessed: 1/07/2026)

5 Scottish Government, 2025. Scotland's Tax Strategy: Building on our Tax Principles (last accessed: 1/07/2026)

6 Although an earlier version of this material was presented to stakeholders at the Scottish Tax conference in September 2025, work for Scottish Budget 2026-27 began earlier than planned leading to a delay in the publication.

7 Scottish Government, 2024. International competitiveness: overview (last accessed: 1/07/2026)

8 Jacob and Vossebürger 2025. Do personal income taxes affect corporate tax-motivated profit shifting? (accessed: 19/06/2025)

9 While the paper finds evidence that business investment decreased in Scotland after April 2017 and 2018 income tax increases, their difference-in-difference approach requires strong assumptions, for example, about the comparability of Galloway and Galashiels to Carlisle and Newcastle.

10 Some countries, such as Denmark, have special tax regimes for high earners recruited abroad.

11 The countries included in the comparison are Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal Spain and Sweden. These are based on the latest published statistics accompanying EUROMOD. The data is based on three years from 2019-2022. (last accessed: 1/7/2026)

Scotland is based on UKMOD analysis undertaken for the Scottish Budget 2025-26 using default settings in order to provide the closest match to published figures. In order to ensure that the comparison reflects larger recent policy changes in Scotland the year 2025 is used.

12 OECD, 2026. Taxing Wages 2026 (last accessed: 1/7/2026)

13 Tax Policy Associates, 2025. Are UK workers over-taxed? The answer in three infographics (last accessed: 1/7/2026)

14 Institute for Fiscal Studies, 2019. How do other countries raise more in tax than the UK? (last accessed: 1/7/2026)

15 While there is evidence that the cost of living, such as cheaper housing, also influences pay producing estimates of its contribution requires multiple pairwise comparisons across different cities. This is something we are considering for future work.

16 Feldstein and Valliant, 1994. Can state taxes redistribute income? NBER working paper series (last accessed: 1/7/2026)

17 Bingley and Lanot, 2002. The incidence of income tax on wages and labour supply, Journal of Public Economics. (accessed: 25/8/2025)

18 Giertz et al., 2018. Taxes, wage capitalisation and the ability of states to redistribute income, GLO Discussion Paper, No. 291 (last accessed: 1/7/2026)

19 Kubik, 2004. The incidence of personal income taxation: evidence from the tax reform act of 1986, Journal of Public Economics (accessed: 25/8/2025)

20 Kleven et al., 2013. Migration and wage effects of taxing top earners: evidence from the foreigners' tax scheme in Denmark, NBER working paper series (last accessed: 1/7/2026)

21 Leigh, 2008. Do Redistributive State Taxes Reduce Inequality?, National Tax Journal (last accessed: 1/7/2026)

22 Lehmann et al., 2013. Labour Earnings Respond Differently to Income Tax and to Payroll Tax Reforms, IZA discussion papers (last accessed: 1/7/2026)

23 Blomquist and Selin, 2009. Hourly wage rate and taxable labour income responsiveness to changes in marginal tax rates, CESifo working paper (last accessed: 1/7/2026)

24 Adam et al., 2019. 35 years of reforms: A panel analysis of the incidence of, and employee and employer responses to, social security contributions in the UK, Journal of Public Economics (last accessed: 1/7/2026)

25 Given the lack of a strong contributory link, apart from State Pension eligibility, Employee NICs could be considered to be similar to an Income Tax.

26 Melguizo et al., 2013. Who bears labour taxes and social contributions? A meta-analysis approach, SERIEs (last accessed: 1/7/2026)

27 It is worth noting when considering the cost to an employer that there is an interaction between any uplift and employer NICs which would also need to be paid on the additional amount.

28 FAI: Scottish Business Monitor Q2 2025 | FAI SCC: SCC QEI Results Q1 – Forth Valley Chamber BCC: National Insurance Creating ‘Powder Keg of Costs’ - British Chambers of Commerce IoD: Policy Voice February 2025: Employers' NICs, infrastructure strategy, apprenticeships, the UK internal market, female entrepreneurialism and the Visitor Levy (Scotland) Act (last accessed: 1/7/2026)

BoE: Monthly Decision Maker Panel data - August 2025 firms reported lowering profit margins, 34% raising prices, 46% lowering employment and 20% paying lower wages than they otherwise would have done. Fewer firms reported having increased prices, lowered employment or lowered wages in response to increased employer NICs (last accessed: 1/7/2026)

29 UK Parliament, 2019. CBI submission to the Treasury Select Committee's inquiry into the impacts of business rates on businesses (last accessed: 1/7/2026)

30 The Guardian, 2025. UK firms’ hiring intentions remain at record low amid rising employment costs

31 REC: Report on jobs, CIPD: Labour Market Outlook, BDO: BDO Output Index hits a 16-month high as businesses frontload amid disruption concerns, Scottish Government: Scotland's Labour Market Insights: April 2026, ONS: Vacancies and jobs in the UK (last accessed: 1/7/2026)

32 Burn-Murdoch, 2026. What if remote working, not AI, is to blame for weak junior hiring?, The Irish Times (last accessed: 1/7/2026)

33 HMRC, 2026. Intra-UK migration of individuals: movements in numbers and income between 2010 to 2011 and 2022 to 2023 (last accessed: 1/7/2026)

34 FAI, 2024. Weekly update: HMRC income tax research and the effect of tax on labour supply and decisions on location (last accessed: 1/7/2026)

35 FAI, 2024. Scottish Income Tax: What do firms think? (last accessed: 1/7/2026)

36 HMRC, 2024. Labour market participation and intra UK migration of taxpayers (last accessed: 1/7/2026)

37 HMRC, 2026. Intra-UK migration of individuals: movements in numbers and income between 2010 to 2011 and 2022 to 2023 (last accessed: 1/7/2026)

38 Scottish Government Economic briefs and bulletins, and in particular Scottish Economics Insights – April 2025 (last accessed: 1/7/2026)

39 Scottish Fiscal Commission, 2025. Scotland's Economic and Fiscal Forecasts (last accessed: 1/7/2026)

40 For example: House of Commons Library, 2025. The financial (minimum income) requirement for partner visas (last accessed: 1/7/2026)

41 Department for Business, Energy & Industrial Strategy, 2021. Understanding the Reasons for Incorporation: Final Report - Policy Summary (last accessed: 1/7/2026)

42 Miller et al., 2021. Intertemporal income shifting and the taxation of owner-managed businesses, IFS working papers (last accessed: 1/7/2026)

43 Egger et al., 2009. Incorporation and Taxation: Theory and Firm-level Evidence, Oxford University Centre for Business Taxation Working Papers (last accessed: 1/7/2026)

44 Streeter, 2022. How do tax policies affect individuals and businesses? (last accessed: 1/7/2026)

45 Department for Business, Energy & Industrial Strategy, 2021. Understanding the Reasons for Incorporation: Final Report - Technical Report (last accessed: 1/7/2026)

46 Companies House, 2021. Companies register activities: 2020 to 2021 (last accessed: 1/7/2026)

47 This will contribute to the Area’s of research interest that we published with the Tax Strategy – this sets out areas of priority for further work Supporting documents - Scotland's Tax Strategy: Building on our Tax Principles - gov.scot