Scotland’s income tax regime is once again in the firing line as a new report reiterates concerns that it is a barrier to growth in the financial services sector.
Research by EY finds high personal tax, a lack of government support in R&D and challenges attracting top-tier international talent are the biggest headwinds to the sector.
Scotland has the potential to increase the gross value add (GVA) of financial services by up to 21% by 2028 if key competitive advantages are harnessed and barriers to growth addressed, according to the research.
In Accelerating Growth in Scotland’s Financial Services Sector, EY says this rate of growth across Scottish financial services, not including related professional services, could add 16,000 jobs to Scotland’s financial services industry and bring total employment in the sector to 105,000 by 2028, from the current 89,000.
Almost half (46%) said Scotland’s personal tax regime is the “leading disadvantage” facing the sector relative to international peers, with a further 36% citing difficulty in attracting top talent due to the less-attractive tax framework and challenges with visa availability and processes.
Workers in Scotland on a salary above £30,000 pays more in income tax than if they earned the same elsewhere in the UK. In the upper brackets, someone earning £50,000 pays an additional £1,500 compared with those in England, and £3,300 on salaries above £100,000.
The Scottish government argues that the tax system is “progressive” by making higher earners pay more to help those further down the earnings league who pay comparatively less tax than their peers elsewhere in the UK.
Among other concerns expressed in the EY research was lower levels of government support and investment research and development (35%), with more than a quarter (28%) seeing a lack of access to capital for early stage fintech startups as a competitive disadvantage for Scotland.
On the positive side, more than a third (36%) of respondents to the EY research said Scotland’s comparatively lower cost of living and doing business are a key strength, with a further two in five (38%) viewing the outlook for the UK’s economic growth as a key advantage.
On the positive side, the report notes a number of advantages that Scotland has over its international peers, including gender balance, cultural diversity and inclusivity (32% of respondents). A similar proportion highlighted the strong availability of skills in key areas, such as emerging technologies and ESG integration, as a competitive advantage.
Scotland’s education pipeline and talent retention were also highlighted as strengths, but more than a third (36%) of leaders said retaining top-tier talent was a potential barrier to growth.
Close proximity to major financial centres such as London, Paris and Dublin is highlighted by more than two in five (43%) leaders as a competitive advantage. But more than a third (36%) said a lack of access to the European market was a barrier to growth, highlighting the loss of the passporting regime for financial services companies post-Brexit as a particular disadvantage for the Scottish industry.
The report recommends a focus on the visa regime, personal tax and infrastructure, making it easy for firms to access and attract talent. It suggests better promotion of Scotland’s global appeal to attract inward investment and more support for early-stage start-up firms and trade delegations focused on FS and Fintech.
Scottish Financial Enterprise (SFE), the trade body, already has a blueprint to increase GVA from £14.3 billion to between £17 billion and £21 billion within five years.
Sue Dawe, EY Scotland’s managing partner for financial services, said the industry “must continue to reinforce existing strengths and address potential barriers to growth”.
She added: “The sector has already done a lot of the thinking about where we need to go, and it is reinforced by this research. We now have to turn that strategy into action, driving sustainable growth and prosperity for years to come.”
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