Scottish businesses must focus on staff retention strategies to combat ‘income tax exodus’

Douglas Russell (Armstrong Watson)

SCOTTISH businesses must focus on staff retention strategies to combat ‘income tax exodus’ – that is the advice from accountancy, business and financial advisory firm Armstrong Watson, following HMRC’s release of recent research which suggests a fall in net migration to Scotland for individuals earning over the higher rate threshold.

The HMRC report – which looked at changes in labour market participation and intra-UK cross-border migration of Scottish taxpayers following the changes introduced to Scottish Income Tax in 2018/2019 – found “some evidence of a fall in net migration to Scotland for individuals earning over the Higher rate threshold, with the size of the fall increasing with income levels.”

The report, published in April 2024, also found that “more individuals moved from Scotland to the rest of the UK and/or less individuals moved to Scotland from the rest of the UK following the policy change” and that this was “primarily driven by an increase in individuals moving from Scotland to the rest of the UK, which could be to reduce their tax burden.” 

Accounting Partner, Douglas Russell warns, “This exodus could be further fuelled by the introduction of the new 45% Advanced Rate Income Tax Band in Scotland, which impacts those earning between £75,001 and £125,140, but particularly individuals earning more than £100,000 who pay an effective rate 67.5% rate of income tax due to the tapering of the personal allowance.”

Concerns around attracting staff to Scottish businesses were evident in the recent results of  Armstrong Watson’s Family, Privately Owned and Owner-managed Business Survey (undertaken in late 2023), where they found that nearly double the number of Scottish business owners (21%) are ‘very concerned’ about attracting the right people over the next 12 months, compared with the national average (12%).

For businesses, the strategy to combat these challenges must be twofold: attracting and retaining talent and minimising tax liabilities.

Douglas Russell suggests, “Whilst businesses may be limited as to the influence they can play over their employees’ personal finances, offering financial education to help understand the changing tax system and where tax efficiencies can be made can be an important support for staff. There may also be the option for some businesses to look at introducing salary sacrifice schemes – where appropriate – too.

“To address the talent drain, businesses should also consider enhancing their value proposition. This may involve offering competitive benefits, flexible working arrangements, and opportunities for professional development. Additionally, a strong company culture and community engagement can make a significant difference in attracting and retaining employees. And of course, not forgetting to extol at every opportunity the many benefits to living and working in Scotland too!”

By adopting a proactive approach to talent management and tax planning, it is hoped that Scottish businesses can position themselves to help mitigate the risks associated with the current fiscal environment and for sustainable growth. 

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