Derek Mackay introduces new income tax system in Scottish Budget

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Finance Secretary Derek Mackay said he has made Scotland the fairest taxed part of UK, as he introduced a new five band system of income tax that will leave those on a salary of £33,000 or above paying more.

He said the Scottish Government had used powers over income tax rates and bands “sensibly”, by freezing the basic rate at 20p, but also introducing a new intermediate rate of 21p, which will kick in after £24,000

The higher rate and additional rates are also being upped by 1p to 41p and 46p respectively – but Mr Mackay is offsetting increases for higher earners with the introduction of a “Scottish starter rate” of tax of 19p, which will apply to the first £2,000 of taxable income £11,850 and £13,850.

Mr Mackay said that this, combined with the increase in the personal allowance brought in by the UK Government, would “ensure that no one earning less than £33,000 which is 70% of all taxpayers will pay any more in tax than they do now”.

A worker in Scotland earning the average salary of £24,000 will be £90 better off in 2018-19, according to the accountancy body ICAS, with this in part due to the increase in the amount workers can make before income tax is applied.

And while Scots earning £33,000 will not pay any more in tax than in 2017-18, ICAS said those on this salary would be £70 worse off than their counterparts in the rest of the UK.

Scottish Government figures showed 30% of tax payers north of the border – those earning £33,000 a year or more – will pay more in income tax next year.

But compared to taxpayers in the rest of the UK, 45% of Scots will be worse off, with someone making £150,000 a year in Scotland paying £1,774 more in income tax in 2018-19 than they would south of the border.

The Scottish Finance Secretary said the changes would raise £164 million for public services, and would mean “Scotland is not just the fairest taxed part of the UK but, for the majority of taxpayers, the lowest taxed part of the UK”.

In the 2015 Scottish election the SNP had pledged not to increase the basic rate of income tax when powers of rates and bands were devolved to MSPs, and furious Conservatives accused them of a “direct breach” of that manifesto promise.

Scottish Tory finance spokesman Murdo Fraser hit out: “This Nat Tax will hit nearly half of Scottish workers in the pocket.

“That is a tax on aspiration, a punishment for daring to work hard, and a direct breach of the promise made by the SNP in its election manifesto.

“Today, every single SNP member of the Scottish Government has broken that promise to the Scottish people.”

The income tax changes form part of a draft Budget package containing £4 billion of infrastructure spending for the coming financial year, and rising to £20 billion over the lifetime of the parliament.

That includes £600 million over the next four years for high speed broadband for Scotland – with Mr Mackay saying this was part of “an ambitious plan to make superfast broadband available to every home and to every business premises in every part of Scotland by 2021”.

Meanwhile health spending next year will increase by more than £400 million – double the amount that would have been needed for NHS spending to keep pace with inflation and taking the overall total to over £13 billion.

And Mr Mackay said councils would have an increase in “core funding” of £94 million – adding that if authorities increase council tax charges by the maximum of 3%, this would raise a further £77 million “which would secure a real terms increase in local government funding”.

As promised he ended the public sector pay freeze – but only workers with a salary of £30,000 a year or less will see wages rise by 3%, the approximate rate of inflation – with higher earners having lower increases.

Overall the Finance Secretary declared his draft Budget a “a comprehensive package of measures designed to protect all that we hold dear”.

He told MSPs: “It provides the investments we need to meet the challenges of today and seize the opportunities of tomorrow. It uses the powers of this Parliament sensibly and in the interests of the country as a whole.”

But Scottish Labour leader Richard Leonard claimed he was cutting day to day spending for councils by £135 million in real terms at a time when local government needs an extra £545 million “just to stand still”.

The Labour leader hit out: “That’s an effective cut of almost £700m to our lifeline services. These cuts are not numbers only evident on a spreadsheet. They represent lifelines. They represent lives.”

Councillor Gail Macgregor of the local government body Cosla also said: “The reality is that this is not a flat cash revenue settlement for local government. It is a cut of £153m for essential local government services.”

She added: “There are serious financial challenges that lie ahead in several areas and there is no doubt that these will have an impact on the essential services that councils deliver. A particular issue is public sector pay if this is not fully funded.”

Scottish Green co-convener Patrick Harvie said that the “real terms cut” to local government funding “was unacceptable”.

With the SNP minority government potentially having to rely on the six Green MSPs to get the Budget through Holyrood, Mr Harvie added: “The Scottish Government still has work to do to present a budget that we can support when it reaches the Stage One vote at the end of January.”

Scottish Liberal Democrat leader Willie Rennie said the Budget “seems to have introduced a modest tax increase” – something the Lib Dems had backed in the 2015 election campaign but the SNP had opposed.

But overall he said: “The budget is a missed opportunity. It does not do enough to meet the long term needs in the economy.”

Meanwhile Scottish Secretary David Mundell said: ” We have delivered on our commitment to make the Scottish Parliament more powerful and more accountable to people in Scotland.

“It has extensive new powers which it must now use to tackle Scotland’s significant economic challenges.

“It is for Holyrood to decide how to use its new income tax powers, but I am deeply disappointed the Scottish Government has decided to pursue tax hikes.

“By making Scotland the highest taxed part of the UK the Scottish Government risks damaging, rather than growing, our economy.”

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