Scottish Financial Enterprise (SFE) has called on the Scottish Government to “recognise its income tax policy is not working” and to take action in its upcoming budget to address “growing divergence between Scotland and the rest of the UK.”

SFE, which represents Scotland’s financial and professional services industry, welcomed the Scottish Government’s focus on economic growth but urged ministers to bring income tax rates in Scotland more closely in line with the rest of the UK when they present the 2025-26 budget on December 4.

“The call comes after the Institute of Fiscal Studies suggested recent increases in income tax rates by the Scottish Government may have reduced rather than increased the devolved tax take, reflecting the possibility of a ‘Laffer Curve’ tipping point resulting in diminishing returns,” said SFE.

“SFE has continually highlighted the potential for income tax divergence to be counterproductive. Earlier this year it conducted research finding 81% of its members are concerned about the impact of tax divergence on retaining staff, with 66% saying changes to the tax regime had harmed investment.”

SFE said it sent a “Senior Leaders Tax and Competitiveness Survey” to “one key contact at each SFE member firm with clear instructions that it should be completed by one senior leader per SFE member firm.”

SFE has 120 members that employ around 100,000 people across Scotland.

“The survey results, conducted anonymously, summarise the responses of 42 senior (c-suite) representatives of those member firms, representing small and medium enterprises to the largest financial institutions, with the  corresponding firms employing a minimum of 50,000 people combined,” said SFE.

Ahead of the budget on December 4, SFE is also urging the Scottish Government to:

• Deliver substantial and sustained infrastructure investment to better support jobs and attract inward investment
• Work more collaboratively with the UK Government and other institutions to ensure a more joined up approach to trade missions and attracting investment
• Improve the business tax environment more generally, such as replicating non-domestic rates relief for hospitality businesses in Scotland

Scottish Financial Enterprise CEO Sandy Begbie said: “SFE has consistently stressed the risk of income tax divergence shrinking the Scottish tax base. We have pursued an evidence-based approach on this issue which has now been vindicated by the Institute of Fiscal Studies.

“It is essential that the Scottish Government resists calls for even further income tax rises. It may be inconvenient for some, but the data strongly suggests that further tax rises would be counterproductive.

“The government must instead recognise that its divergence policy is not working and take action to begin changing course.

“We recognise that divergence cannot be unpicked over night, but bringing even some income tax rates more closely in line with the rest of the UK would be a step in the right direction and a clear signal that the Scottish Government recognises the concerns of business and its ability to grow, invest, and attract and retain talent.

“Such changes should be part of a wider package of measures that improve the business environment in Scotland. Additional support for other sectors, such as hospitality, would have a wider, positive knock-on economic impact.

“Equally, we need to see a commitment to substantive and sustained spending on infrastructure to better support jobs and to attract further international investment in Scotland’s world-class industries, including financial and professional services.

“With the recent UK budget damaging business confidence, it’s even more important that the Scottish Government listens to the needs of business, helping to drive investment, create jobs and deliver more sustainable economic growth.”