Scottish Income Tax Research

1 Introduction

Background

Since 2017, the Scottish Government has had the authority to set income tax rates on earnings from employment, self-employment, pensions, and property income. Consequently, the Scottish Government can vary tax rates, change the thresholds between tax bands, and alter the number of tax bands.

Since obtaining these powers, the Scottish Government has implemented income tax policies that differ from the rest of the UK. These include the introduction of two additional tax bands, resulting in a five-band system in the 2018-2019 tax year, and subsequent rate adjustments to align with their fiscal policies and economic objectives. The most recent significant changes were made in the 2024-2025 tax year, which saw the introduction of a sixth ‘Advanced’ rate of income tax at 45% for incomes between £75,001 and £125,140, and the top rate was increased to 48% for incomes above £125,140.

While this approach has created a more progressive tax system, analysis by the Scottish Fiscal Commission and the IFS suggest that the changes would have behavioural impacts. The Scottish Government is committed to further research on whether, and if so, how Income Tax divergence has influenced the competitiveness of the Scottish economy, and has previously published an evaluation of the 2018-2019 tax changes.^[1]

It was in this context that the Scottish Government commissioned IFF Research to conduct qualitative research to explore whether, and if so, how Scottish Income Tax policy may affect:

• businesses in Scotland, including their ability to grow, attract and retain talent, attract investment and offer competitive salaries; and
• the competitiveness of Scotland’s economy, alongside other contributing factors.

Methodology

The research comprised of in-depth interviews with businesses that operate in Scotland. Interviews were conducted with someone with responsibility for the strategic priorities of the business. The fieldwork took place between 21st May and 21st July 2025. Interviews took place over the phone or Microsoft Teams and lasted up to an hour.

The sample for the interviews was sourced from Market Location, a commercial database of UK businesses. Businesses were screened to ensure they operated in Scotland and that at least some of their employees resided in Scotland, and were therefore subject to Scottish Income Tax.

IFF called a total of 2,687 businesses to invite them to participate in the research. The original target for the project was 35 interviews, however, due to recruitment challenges, 27 interviews were conducted by the end of the extended fieldwork period.

Medium and Large businesses were particularly challenging to recruit, including difficulties reaching an appropriate person within the business to take part and numerous businesses declining to participate because they felt that SIT was not an issue for them.

IFF also experienced several instances of respondents not showing up to or cancelling the interview once it had been scheduled. This was despite an £80 incentive offered as a thank you for taking part.

To aid recruitment of the Medium and Large businesses, IFF Research commissioned an external recruitment agency. They recruited an additional four businesses, taking the total to 27. The achieved interviews split by business size and sector is shown in Table 2 and the original targets are shown in Table 1. The targeted sectors were agreed with the Scottish Government prior to the recruitment starting.

Unfortunately, no interviews were completed with Medium and Large businesses in technology and digital industries, nor finance and insurance, where the Scottish Government expected Scottish Income Tax to have a greater impact.

As well as sector and size targets, IFF aimed to achieve a mix of businesses operating solely in Scotland and businesses operating in both Scotland and the rest of the UK. 10 interviews were conducted with businesses operating exclusively in Scotland and 17 were conducted with those operating in both Scotland and the rest of the UK.

IFF also aimed to achieve 2-3 interviews with businesses that were founded in the last five years and 2-3 interviews with those that had grown significantly in the last five years.^[2] Businesses satisfying these criteria ended up being difficult to reach. Ultimately, one interview was conducted with a business that reported significant growth, however, none were conducted with those that were founded in the last five years.

Report interpretation

The qualitative findings in this report are intended to provide insight into the behaviours and experiences of a range of businesses. By design, the qualitative discussions set out to capture a rich and detailed understanding of different behaviours and experiences, not to determine their prevalence.

Where the report indicates that ‘few’, ‘some’, or ‘many’ businesses experienced or felt something, this is in relation to the businesses that participated in the qualitative interviews only. Findings from these qualitative discussions are indicative but cannot be considered representative of the wider business community in Scotland. They do not mean that subsets of businesses are not more affected by SIT divergence than these findings suggest.

About this report

The findings in this report have been split into five further chapters with each structured around key themes that address the project’s core objectives:

• Chapter 2 covers the current priorities for the businesses interviewed, significant investments made in the last five years and the factors that drive decision-making
• Chapter 3 explores the main challenges currently facing businesses, as well as their experience of recruitment and retention over the past five years
• Chapter 4 explores how businesses would define ‘competitiveness’, how they stay competitive in their industry, and what they think could improve competitiveness
• Chapter 5 covers the effects of tax policies on the businesses interviewed, their awareness and understanding of Scottish Income Tax, as well as the impacts it has on their business
• Chapter 6 summarises the key findings from the research