The basic rate of income tax will be frozen and the higher rate will be set at £43,430, rather than rising in line with that set by the UK government. It means an estimated 420,000 workers, will pay £314 more tax than their counterparts elsewhere.
This represents the first divergence of income tax within the UK.
He said: “Let me be clear, I will not pass the costs of UK austerity on to the household budgets of the lowest income taxpayers.
“I will protect low and middle income taxpayers at a time of rising inflation by freezing the basic rate of income tax.
“However, we cannot accept that at this time of austerity top earners should benefit from an inflation-busting tax cut. So I will limit the increase in the Higher Rate Threshold to inflation and not give a substantial real-terms tax cut to the top 10% of income earners.
“The higher rate threshold will be set at £43,430 and, while I sympathise with those who have argued for an increase to the additional rate, I have had to balance that with the risk to our economy and am maintaining the current rate.
“This Government’s approach is the right thing to do, for our economy, for jobs and our public services.”
Mr Mackay continued: “For the first time, there is now a direct link between Scotland’s economic performance and public spending.”
Steven Cameron, pensions director at Aegon said the decision not to raise the higher rate threshold has a knock-on consequence for pensions relief.
“Scots keen to avoid paying higher rate tax might consider contributing the excess over £43,430 into a pension. Provided they claim their higher rate tax relief, a contribution of £1,570 will effectively cost them £942, with the balance coming from the Government,” he said.
“In future years, the Scottish Government may go further and use its new powers to vary rates of tax by band or introduce new bands.
“This will add a new layer of complexity to advice on pensions. Broader pensions policy, such as retirement ages and access to the new pension freedoms, continue to be set by the UK Government so cannot be changed by the Scottish Government.”
Extending a package of support for business, Mr Mackay said the business rates poundage will be reduced by 3.7% to 46.6p.
A new air departure tax would replace air passenger duty and will be cut by half by the end of the parliament.
The Small Business Bonus Scheme will be expanded by raising the eligibility threshold for 100% relief to a rateable value of £15,000. This will take 100,000 properties out of rates altogether
He said he could not cut the large company business rate but the threshold for the very largest businesses will rise to £51,000, reducing the tax burden on 8,000 businesses.
He committed £221m to support skills, training and employment in Scotland and said the UK government had given with one hand and taken away with the other with regard to funding the Apprenticeship Levy which was “not new money”.
He said the government will launch the already-announced £500m Scottish Growth Scheme in 2017, offering financial support for business investment.
An agreement has been signed, with Dundee City Council to allow the Dundee Central Waterfront Growth Accelerator to go ahead.
A public sector pay policy for 2017-18 guarantees the Scottish Living Wage, offering those earning less than £22,000 a basic pay award of more than 1% and capping other basic awards at 1%, whilst continuing “our no compulsory redundancy policy”.
Bryan Buchan CEO of Scottish Engineering said: “Already seriously trailing the rest of the UK in terms of GDP and employment levels, today’s Scottish Budget, presented by Finance Secretary Derek McKay, will ensure that Scotland will be the highest taxed part of the UK both in personal and business sectors.
“The finance secretary has not raised the threshold of the higher rate of tax, as the UK government has proposed, which means the middle rate tax payers in Scotland will be penalised. Let us hope that this is not the first in a series of tax hikes which will inevitably see a diminution of the better qualified and paid staff in our companies.
“How that will reflect on businesses north of the border will very quickly become obvious when growth becomes static and the tax take drops as higher earners move elsewhere and there is inevitable upward pressure on salaries, making the productivity ‘hill’ all the steeper.
“While we see a change in the threshold from £51m to £35m in supplementary business rates this will still mean that the largest engineering businesses in Scotland which employ most people, will still be caught in the trap. I have to ask if this will result in movement of resources to an area of the UK with a lesser tax regime.
“The growth scheme of £500m will need to deliver a real platform for recovery from a position of disadvantage.”
James Paterson, director and property tax expert at BDO, said: “It is disappointing that the Government has not seized the opportunity to alter the bands at which LBTT becomes payable, and in particular in relation to properties above the £325,000 mark above which the rate of LBTT reaches 10%.
“Given the reported decrease in activity levels in this part of the market, Derek Mackay could have used this budget to stimulate activity.”
Nicola Barclay, chief executive of trade body Homes for Scotland said: “We had requested the Scottish Government extend the five per cent banding of the Land & Buildings Transaction Tax given the impact this is having on house purchases above the current £325k ceiling.
“Whilst we fully support the Scottish Government’s aim of helping First Time Buyers, we must ensure that the property ladder functions at all levels. When aspirational buyers choose not to move, this prevents others further down the ladder from being able to do so.”
However, Alasdair Steele, Head of Scotland Commercial at Knight Frank, said: “The Scottish Government’s decision to keep land and buildings transaction tax at current levels is good news for Scotland’s commercial property industry.
“Since the UK Government’s changes to stamp duty in March, Scottish assets have been more tax competitive than properties in the rest of the UK – a positive differentiator for the market, given the amount of uncertainty we’ve seen in 2016. We’d hope to see this translate into increased interest in Scotland’s commercial property markets, particularly from foreign investors, in the next 12 months.”
Tory finance spokesman Murdo Fraser (above) said the budget would mean local councils face a revenue cut of £130m.
He added that the finance secretary was making Scotland the most expensive part of the UK to work and live in.
Mr Mackay said Mr Fraser has forgotten a number of things including the reduction to the Scottish government budget.
He accused the Scottish Tories of being “anti-devolution”.
Labour leader Kezia Dugdale said there was a cut in money for local government, denied by Mr Mackay who said “this just isn’t true.”
Local Government and local services will have over £240 million more available them next year, Mr Mackay said.
He unveiled a package of increased investment in councils, schools, social care services and the potential for councils to raise additional revenue from the Council Tax.
He said that the £111 million of additional Council Tax revenues expected to be raised from reform of the upper bands will be available to be spent locally. He announced the Scottish Government will use its own resources to fund £120 million going to schools to close the attainment gap.
the basic rate of income tax will be frozen at 20 per cent.
the higher rate of income tax will be frozen at 40 per cent.
The higher rate payment threshold will be frozen in real-terms at £43,430
the additional rate of income tax will remain at 45 per cent and the threshold will be unchanged
100,000 properties will be exempt from business rates under the small business bonus scheme by increasing the 100% relief threshold to £15,000
the overall business rates poundage – the core tax rate that applies to the rateable value of business properties – will be cut by 3.7% to 46.6p.
the threshold for the large business supplement will be increased to £51,000 restricting liability to the very largest businesses and excluding 8,000 business properties
the residential and non-residential rates and bands for Land and Buildings Transaction Tax (LBTT) will remain unchanged
the Standard Rate of Scottish Landfill Tax (SLfT) will be increased to £86.10 per tonne and the Lower Rate of SLfT to £2.70 per tonne in line with RPI inflation and landfill charges in the rest of the UK.
Over £470 million of direct capital investment to begin delivery of 50,000 affordable homes,
Over £140 million for Energy Efficiency programmes to help us deliver our climate change targets
Over £100 million investment in digital and mobile infrastructure, to improve digital connectivity, grow Scotland’s digital economy and increase digital participation, including support for our commitment to deliver 100 per cent broadband access by 2021