The Scottish Government has unveiled a draft budget which raises income tax in a bid to raise an extra £164m to pay for public services.

Finance Secretary Derek Mackay announced his plans to create two new tax bands – a ‘starter’ band and an ‘intermediate’ band.

Setting out the proposals, Mr Mackay said: ‘The Scottish Government has faced continued austerity from the UK Government. Over a ten-year period, Scotland’s block grant will have been cut by £2.6bn in real terms.

‘In order to mitigate UK budget cuts, protect our NHS and other public services, support our economy and tackle inequality in our society, we have decided to reform income tax in Scotland.’

Unveiling the local government funding settlement alongside his Budget, Mr Mackay said local authorities would receive more than £10.5bn in 2018-19. However, councils will need to up their council tax by 3% in order to increase their cash.

Launching his plans, he said: The Scottish Government has continued to ensure that our partners in local government receive a fair funding settlement despite further cuts to the Scottish Budget from the UK Government.

‘We have protected day-to-day local government spending while increasing the capital budget. Local Authorities will receive more than £10.5bn though the local government finance settlement in 2018-19.’

‘We are using our tax varying powers to boost investment in public services, and if local authorities choose to use their powers to increase council tax by up to 3% they will have an overall real-terms increase in the funds at their disposal, to support local services.’

The Budget invests an additional £400m in health services and provides an additional £120m to schools. The one percent public sector pay cap will also be lifted, with up to 3% pay rises for those earning up to £30,000.

A programme of infrastructure investment will also see more than £4bn investment for 2018-19 and a commitment to invest £20bn over the life of the parliament, including a commitment to deliver 50,000 affordable homes, universal superfast broadband and £1.2bn for transport infrastructure.

The income tax proposed changes will mean:

• Earnings of £11,850-13,950 will be taxed at a 19% starter rate
• The Scottish basic rate of 20% applies for those earning £13,850-£24,000
• For £24,000-£44,273,  a new intermediate rate applies
• A higher rate of 41% is taxed for £44,273-£150,000
• Earners above £150,000 pay a top rate of 46%