Majority of Scottish businesses feeling ‘little to no impact’ from Scottish Government's income tax policy

The majority of Scottish businesses have felt “little to no impact” from the Scottish Government’s income tax policy, according to the latest Fraser of Allander Institute’s Scottish Business Monitor (SBM) for the second quarter of 2024. 

The SBM found that 57 per cent of Scottish businesses from a range of sectors have not felt the effects, while 37 per cent say they have felt the effects more sharply.  

In May, the institute surveyed 300 firms, asking a series of questions relating to firms’ views of the impact on their business.  

It is against the backdrop of the Scottish Government’s income tax changes, which were announced in December last year by the finance secretary Shona Robison. A new 45 per cent band was introduced for people earning between £75,000 and £125,140 and the top rate of tax, paid by those earning more than £125,000, also increased from 47 per cent to 48 per cent. 

The findings from the new SBM show that 28 per cent of firms reported no impact from the policy, while 29 per cent felt “a little” impact. 

17 per cent say they have experienced a “fair amount” of impact, and another 17 per cent of firms’ operations have felt a “significant” impact. 

The construction sector is the worst affected by the policy. 27 per cent of those firms have reported a significant impact, whereas wholesale and retail businesses has been the sector least affected – with 34 per cent suggesting no impact. 

Firms’ that highlighted issues with the new income tax policy say they are struggling with recruitment and retention as a result, citing higher taxes a cause for employee dissatisfaction. 

Wage pressures are also an issue, with many of the respondents reporting raising wages to compensate for the reduction in take-home pay for employees. 

Fears around remaining competitive and investment with other areas of the UK were raised as well, and a few businesses say they are considering moving operations or investments south of the border. 

The institute say despite these feelings, there were also neutral or positive responses. Many firms reported no impact from the changes, while others recognised that the higher tax rates play a role in funding public services in Scotland, such as healthcare and education. 

Professor Mairi Spowage, director of the Fraser of Allander Institute at the University of Strathclyde, said: “These results shed light into the ongoing debate on how tax policies are affecting businesses and the broader Scottish economy. While most firms report minimal impact from the current tax policy, a notable minority are experiencing challenges, especially in areas like staffing and investment. 

“This divide underlines that taxation is a particularly contentious issue, and ties into the discussion happening across Scotland about how diverging rates of income tax are affecting the economy. 

“As the Scottish Budget approaches on 4 December, the deputy first minister will need to weigh whether the current tax balance is right – or if there's any scope for change."