Scottish Income Tax Research

Executive summary

Introduction

The Scottish Government commissioned IFF Research to conduct qualitative research to explore whether, and if so how, Scottish Income Tax (SIT) policy may affect businesses in Scotland. This includes examining their ability to grow, attract and retain talent, attract investment and offer competitive salaries. The research also considered the impact of SIT on the wider competitiveness of Scotland’s economy, alongside other contributing factors.

The research comprised of in-depth interviews with businesses that operate in Scotland. Only businesses which had some or all of their employees living in Scotland, and were therefore subject to Scottish Income Tax, were recruited for this research. Therefore, it excludes firms who might have considered operating in Scotland in the absence of Scottish Income Tax policy or who have left Scotland as a result. However, the vast majority of firms in this category are likely to be smaller businesses operating only in the rest of the UK.

Interviews were conducted with someone with responsibility for the strategic priorities of the business. A total of 27 interviews were conducted – this was less than the original target of 35 due to recruitment challenges (see methodology section for further details). The fieldwork took place between 21^st May and 21^st July 2025.

Key findings

What do businesses mean when referring to competitiveness?

Businesses expressed a wide range of definitions of competitiveness and strategies for achieving it. Themes around competitiveness ranged from concerns about productivity, product and service differentiation, price, and, to a lesser extent, how government intervention through policies or regulations might help support business activities.

Less frequently discussed in relation to competitiveness were issues such as environmental targets or staff well-being, although a handful of businesses highlighted these topics.

Businesses did not tend to spontaneously raise tax as an issue when discussing competitiveness. When this was explicitly explored, several noted that this should not have a notable impact on their competitiveness since their competitors are also subject to the same rules; and that so long as businesses are compliant, they are effectively all in the same position.

Overall, the findings indicate that definitions of competitiveness are highly contextual to specific industries and business models. In this sense, while businesses tend to share general definitions of competitiveness, the specific strategies that they pursue to enhance their competitive position will vary across sectors, business sizes, and market niches.

What do businesses assess to be the main impacts of Scottish Income Tax policy and how does this compare with other forms of taxation?

While most businesses expressed concern that taxation in general was increasing overheads and inhibiting their growth, only a small number identified Scottish Income Tax (SIT) specifically as an issue.

Recent increases in National Insurance contributions were most frequently cited as the primary tax-related concern, with business rates and inheritance tax also mentioned as areas of difficulty.

When SIT was discussed, it was almost always in response to interviewer prompting, suggesting that this is not the foremost concern for businesses.

That said, a small number of businesses in economically important industries did articulate some concerns regarding changes to SIT. These concerns largely centred on the ability to retain talented employees. This type of feedback tended to be more common among businesses operating in high-salary sectors such as technology and finance, where work is not geographically tied to a particular location.

What are the impacts of Income Tax policy on the competitiveness and growth of specific sectors within Scotland?

SIT does not appear to have a significant impact on competitiveness or growth in most industries. However, when SIT was raised as a concern for competitiveness, it was primarily in relation to the ability to attract and retain talent that might otherwise be tempted to move to lower-tax jurisdictions, whether in England or further afield. This threat of ‘brain drain’ was noted especially by businesses in the tech and financial sectors that had employees in both Scotland and England. That said, even when these concerns were raised, they were primarily discussed as hypothetical problems (i.e., what employers feared might happen) rather than challenges that businesses had experienced directly.

How have businesses had to adapt in response to Scottish Income Tax policy?

Businesses generally reported they had not adapted in response to SIT, due to the limited impact that it has had on them. Moreover, even when concerns about SIT were raised, very few modifications to business operations were directly attributed to it.

Some that were facing staff retention challenges reported that this had prompted various strategic responses from them. However, these were reported not to have been influenced by SIT directly.

These changes included efforts to improve workplace culture, the introduction of flexible working arrangements, and the implementation of employee incentive schemes. In a small number of cases, businesses reported introducing salary deferment options to assist high-earning employees affected by higher tax bands.

How do businesses differentiate between devolved Income Tax policy impacts and other macroeconomic and policy factors (Minimum Wage, inflation, migration policy, reserved taxation etc.)?

Overall, businesses found it difficult to distinguish the specific impact of devolved Income Tax from other economic or policy challenges. This is largely because most perceived SIT as having less influence compared to other policy changes (such as increases in employer National Insurance contributions) or broader macroeconomic pressures (such as the cost-of-living crisis).

While there was a general sentiment that taxes were ‘too high’, only a small number of businesses could identify any impacts—potential or realised—specifically related to SIT within this wider policy context.

How important is Income Tax policy in business decision making? What other factors are important?

Building on the above, SIT appears to have a limited impact on business decision making. Even among businesses that identified potential effects from SIT changes—such as those related to employee recruitment and retention—almost none could point to any concrete adjustments made in direct response to the SIT changes.

In one instance, a business in the Professional, Technical and Scientific Services sector indicated plans to focus expansion efforts outside of Scotland due to recent SIT changes; however, this viewpoint was unique among the 27 interviews conducted.

Ultimately, this project did not find strong evidence that devolved Income Tax is significantly impacting business decisions; and it suggests that its influence is considerably lower when compared to broader economic factors, such as business climate perceptions, sector-specific dynamics, energy costs, or recent and anticipated tax changes implemented by the UK government. However, this does not mean that Scottish Income Tax is not a concern for some businesses.