Financial firms warn Scottish tax regime puts growth at risk

The Herald Scotland

a day ago

The latest report from EY has a stark warning for John Swinney from inside Scotland's financial sector.
It's a warning the First Minister has heard before: high taxes are making the country less competitive.
Some 46% of 70 senior industry figures surveyed said Scotland's tax rates were putting the sector at a disadvantage compared to international peers.
In fact, more than two-fifths — 42% — said Scotland's tax rules for high earners were its biggest disadvantage compared to other countries.
In the 2023 Budget, the SNP introduced a new 'advanced' rate of 45% on incomes between £75,000 and £125,140, and increased the top rate to 48%.
Those earning less than £30,300 — around 51% of Scottish taxpayers — will pay slightly less income tax in 2025–26 than if they lived elsewhere in the UK.
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Taxpayers earning the median income of £29,800 will be £5 better off than if they lived south of the Border.
However, a taxpayer with an income of £50,000 pays £1,528 more a year in Scotland than in the rest of the UK, while someone on £100,000 pays £3,332 more, and someone on £125,000 pays £5,221 more — equivalent to a 7% cut in take-home pay.
Given that the average annual salary in Scotland's financial services industry is £43,000, the report warns that these levels of taxation 'are likely to have a disproportionate impact on the financial services industry, with the potential to affect talent attraction and retention across all levels of the workforce.'
'What you're starting to hear now is the phrase 'Scottish allowance' or 'Scottish premium'. I would say that's starting to become a real issue,' Sandy Begbie, Chief Executive of Scottish Financial Enterprise, told EY.
The consultancy recommends 'changes to the personal tax regime to address disparities between Scotland and the wider UK, and beyond'.
But is there any enthusiasm for tax cuts?
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Well, Scottish Labour leader Anas Sarwar has already said he would do something along those lines if he moves into Bute House next year.
While he shied away from committing to end the cross-border divergence on tax when speaking to The Herald at the start of the month, he did say there would be 'closer alignment'.
To be fair, John Swinney also wants closer alignment — it's just that he wants the UK Government to move closer to the Scottish Government.
Whoever wins next year will need to find a way to tackle the £5 billion black hole in the budget.
Updated forecasts from the Scottish Fiscal Commission (SFC) a few weeks ago warned of a £2.6bn gap in resource spending and £2.1bn in capital spending.
Currently, those higher tax rates — which mean around £1.2bn extra a year for the Scottish Government's coffers — help chip away at it.
However, one of the other key means of tackling it is through growth.
Pillar 2 of the SNP administration's new Fiscal Sustainability Delivery Plan is to increase business activity, employment and wages.
But businesses say that that growing of the economy is unlikely without tax cuts.
That the Scottish Government's current progressive tax rates mean investors hesitating, start-ups scaling elsewhere, and talented workers choosing London or Luxembourg over Leith.
That's the challenge for any party boss. How do you balance the books without sacrificing fairness for taxpayers and pushing business out the doors?