SCOTLAND is the fairest taxed part of UK, Derek Mackay signalled as he set out a new five band system of income tax that will see those on modest wages pay less, the better off pay more and generate an extra £164 million for public services.

Under the new system those on between £11,850 and £13,850 will see a 1 per cent cut in a new starter rate, while those earning between £24,000 a year and £44,273 will be on a new 21 basic per cent rate.

Despite the new basic rate for this group of earners rising by one per cent, the Finance Secretary said those earning up to £33,000 a year would not see their income tax rise as a result of the increase in the personal allowance. The move would see seven out of ten Scots will pay less, he said.

Instead, Mackay directed the increase towards the 30 per cent of bigger earners, announcing that the higher and top rate would rise to 41p and 46p in the pound from 40p to 45p.

Anticipating criticism that he did not propose a larger increase for the richest, Mackay told Holyrood he had been warned that those earning more than £150,000 could move their tax affairs across the Border, therefore reducing Scottish Government revenue.

He said the reforms were necessary to mitigate a £200m cut to the Scottish Government revenue budget from Westminster, as well as to protect the NHS, other public services and to support the economy.

As expected Mackay used his draft Budget to end the one per cent pay cap that had been imposed on public sectors –although some will see their salary rise by less than inflation.

The Finance Secretary pledged a “guaranteed minimum pay increase of 3 per cent’’ for all public sector workers earning £30,000 a year or less, while those earning over £30,000 will see wages increase by two per cent. For staff on more than £80,000 a year or more the rise will be capped at £1,600.

He also pledged an increase in health funding of more than £400 million – double the amount that would have been needed for NHS spending to keep pace with inflation – taking spending on the NHS in Scotland to more than £13 billion in 2018-19.

Almost quarter of a billion pounds has been promised to nurseries, as the sector aims to meet the Scottish Government pledge to double the amount of free childcare pre-school youngsters receive to 600 hours a year by the end of the parliament.

In terms of councils, he said resource budget funding will be protected in cash terms while he capital budget increased in real terms “resulting in a total increase in local authority core funding of £94m”.

“This Budget is a comprehensive package of measures designed to protect all that we hold dear,” he told the Scottish Parliament.

“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.”

David Eiser, head of fiscal analysis for the Fraser of Allander Institute, said: “In revenue raising terms, the policy announcements today are relatively modest adding less than one per cent to the Scottish resource budget. But combined with changes announced last year, the Scottish income tax schedule now looks quite different from that in the rest of the UK. Alongside increases in the higher and additional rate for income tax, the announcement of a new starting rate of 19 per cent will have surprised many. That being said, the maximum gain to any taxpayer from this lower rate is just £20 per annum.”

Scottish Conservative finance spokesman Murdo Fraser branded the creation of a new basic rate the “Nat tax” and accused the SNP of breaking a 2016 manifesto promise pledging not to increase the basic rate for those on low or middle incomes. He said there was “no justification” for the tax rises being imposed, saying analysis from the Scottish Parliament Information Centre shows the block grant from Westminster is increasing in real terms. Mackay said if the Scottish Tory policy of keeping income tax rates in line with the rest of the UK was implemented, public services would be facing a £500m cut.

Scottish Labour leader Richard Leonard said the Scottish Government were tinkering around the edges and accused Mackay of producing a “Tory-lite draft budget”.“What [the Finance Secretary] is doing today is cutting day to day spending in real terms by £134m when councils have already told him that they need £545m just to stand still,” he said. “That is an effective cut of almost £700m to lifeline local services.”

Greens co-convener Patrick Harvie welcomed the changes to the income tax bands and rates which he said heralded a more “progressive” system. On public sector pay, he said: “I will wait to hear the response of the unions who represent those workers before taking a final view but certainly those who are at the bottom end of the income scale absolutely deserve the pay increase that we’ve argued for and that the Scottish government today is applying, at least to its own workers.” Harvie said the “downside” of the Budget was the cost of the pay increase in local government “is not being met by the Scottish government grant to local councils”.