How can Scottish businesses navigate income tax challenges to attract and retain talent?

Recent research suggests the increased divergence of the tax burden for high-earning Scots compared to those on equivalent earnings south of the Border is potentially driving migration south of the Border.

Whilst business owners can’t influence Scottish tax bandings, it does mean you may need to consider implementing new strategies to attract and retain talent, as well as ways to minimise employees' tax liabilities.

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.”

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 we 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%).

But what can Scottish businesses do to prevent staff moving South of the Border?

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

Optimising tax liabilities

If a heavier tax burden is one of the leading factors in retaining a highly-skilled Scottish workforce, businesses must look at ways to help navigate the new tax landscape in order to minimise tax liabilities (both for business owners and their employees).

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. Some personal strategies to consider may include:

• utilising all available allowances and reliefs
• income splitting to transfer a portion of income to a spouse taxed at a lower rate
• making pension contributions to reduce taxable income
• investing in ISAs and other tax-efficient investment options.

Salary sacrifice

From both a business and an employee tax saving perspective, implementing a salary sacrifice scheme is an option employers might also consider to help reduce the increasing tax burden. Whilst not appropriate for all employees or businesses, for many, foregoing part of a salary in exchange for pension contributions or fully-electric cars can result in employees receiving a higher take-home pay compared to receiving the benefits outside of the scheme – and a lower NIC for employers too. This is a complex area however and it is best to seek advice when considering implementing such schemes.

Attracting and retaining talent

To address the talent drain, businesses could 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, you can position your business to help mitigate the risks associated with the current fiscal environment and also for sustainable growth.