Tax hikes and funding cuts announced in December could result in more Scottish entrepreneurs leaving the country in search for better opportunities, Ross Stupart has warned.
The tax partner at RSM UK said there was growing concern about a "two-pronged risk" stemming from higher income taxes on the one hand and fewer university places for Scots on the other.
The Scottish government announced in its December Budget it would introduce a 45 per cent income tax band as well as add 1p to the current top rate of 47p from April.
The move will mean there will be six tax bands in the Scottish income tax system compared with three in England and Wales.
The top rate of tax, payable on income over £125,140 in Scotland, will be 3p higher than in England, where it is payable from £150,001 per annum.
Stupart said the tax policy, alongside aspects of the government's spending policy, threatened to create a perfect storm for brain drain in Scotland, with tax seen to be penalising higher earners on the one hand, while spending policy around university funding meant young talent was forced to leave the country on the other.
"There's this potential storm that we are worried about, in a way, that if a tax policy is risking losing our current generation of entrepreneurs to across the border, and our government funding policy of university places is chasing students who are the next generation of entrepreneurs down south, are we at risk of losing our current generation and our future generation of entrepreneurs which could be the future wealth creators, the future jobs in Scotland.
"That is a real worry for us, that two-pronged risk," he said.
Scottish university places are offered for free to Scottish students, but the government has announced funding cuts for universities of £28.5mn in its Budget, equating to an estimated 1,200 funded places to be cut.
The most unhelpful thing for the sector is the differences in tax regimes across the different countriesStupart said: "What's happening is a lot of Scottish students are going down across the border and paying for tuition at English universities. And the worry there is, is there are risk that we're losing the next generation of entrepreneurs to across the border."
The solution, according to Stupart, would be to have a form of means testing for university places and at the same time reduce the higher rate income tax bands. Then create higher value jobs so workers pay more tax that way.
A Scottish Government spokesperson said: "Despite the UK Autumn Statement delivering a worst-case scenario for Scotland’s finances, we continue to invest in key services and priorities.
"Tax policies, which are progressive and grounded in evidence, carefully balance the need to raise revenues with the impact on taxpayers and the economy."
According to the Scottish Government the number of PAYE employees in Scotland has been on an upward trend to 2.46mn in January 2024, up 1.1 per cent over the year and its highest level since the series began in 2014.
They said since Scottish income tax was introduced in 2017-18, net migration of working age people from the rest of the UK to Scotland has averaged almost 7,000 per year.
"Scots enjoy a range of support not available in England such as free tuition - ensuring access to university based on the ability to learn and not the ability to pay."
Stupart said the income tax differential between Scotland and England was also creating issues within firms operating cross-border.
From April, earners of £75,000 or more will pay the advanced rate of 45 per cent, while the highest earners will pay 48 per cent versus 45 per cent in England.
The Scottish Fiscal Commission has estimated introducing the 45p rate band and raising the top rate will increase income tax revenue by £82mn. Once the freeze in the higher rate threshold is factored in, the government estimates it will have £389mn more to spend.
But for taxpayers, Stupart said, this meant someone on a salary of £50,000 will pay £1,500 more in income tax in Scotland than they would in England. For a salary of £85,000 the gap is even more pronounced at close to £2,600.
"The most unhelpful thing for the sector is the differences in tax regimes across the different countries," he said.
This was particularly true where advice firms operate cross-border and have employees in both jurisdictions, something becoming more common with increased consolidation, he said.
"How do you sit there and talk to an employee in Leeds and an employee in Edinburgh who have to buy homes which probably cost the same thing, you're trying to pay them roughly the same amount but one comes out net of tax less than the other.
"That has to have motivational issues for the workforce."
Businesses might choose to pay a higher gross salary in Scotland, he added, but this comes at a cost to the business.
Stupart said: "The income tax rate differential escalating as it will from April, I think that just seeks to exasperate the risk of that entrepreneurial talent looking to across the border, thinking well what ties do I have to Scotland, what am I benefitting from elsewhere."
But the government spokesperson said the 2023 EY Attractiveness Survey showed the number of FDI projects in Scotland in 2022 had increased by 3 per cent to a record high of 126. This compared with growth of 1 per cent across Europe and a fall of 6 per cent in the UK.
"Scotland continues to be attractive to businesses, with foreign investment growing faster than the UK’s and Europe’s in recent years," they said.
Income tax rates in Scotland are set by the Scottish government, though the taxes are collected by the UK government. National Insurance however is taxed by the UK government.
carmen.reichman@ft.com
