THE SNP has been accused of “setting a dangerous precedent” which could damage the economy after pushing ahead with plans to make Scotland the highest taxed part of the UK.

Setting out his budget for 2017-18, Finance Secretary Derek Mackay confirmed middle class workers would pay an average of £314 more per head next year than if they were living south of the border.

The threshold for the 40p rate of income tax will rise by inflation in Scotland to £43,430 next year, but to £45,000 in the rest of the UK under Tory plans to ease taxes on higher earners.

Herald View: Mackay’s Budget makes history in a circumspect way

The Conservatives plan to raise the threshold to £50,000 by 2020-21, when in Scotland it is forecast to be £46,551, meaning an additional £700 more on average north of the border.

Around 360,000 people currently pay the 40p rate in Scotland, 14 per cent of all taxpayers.

Mr Mackay said it was better to withhold a tax cut for high earners than raise taxes on the low paid, and said his budget would improve public services, support the economy and provide the foundation for future growth and prosperity.

He told MSPs: “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 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 per cent of income earners.”

Gerry Braiden: Devolution not SNP 'cuts and power grabs' tolled the bell for council powers

Liz Cameron, Chief Executive of the Scottish Chambers of Commerce, said higher taxes could deter people from living and working in Scotland.

She said: “Creating a differential between tax bandings north and south of the border will set a dangerous precedent.

“Ultimately, growing our economy rather than increasing taxes will provide the most sustainable route towards boosting tax revenues and thus public sector spending.

“If Scottish businesses and Scottish based staff are taxed more, that would not seem to be a situation designed to attract investment and grow Scotland’s economy.”

Davd Bell: Threshold rise marks historic divergence for Scotland

David Watt, head of the Institute of Directors in Scotland, added: “A taxation disparity between Scotland and the rest of the UK is not good news for business when competing for talent.

“It can send the wrong messages to those we want to attract to Scotland to fill the top jobs, and create others. This is a perfect example of a policy that sounds good on the ground, but the net long-term impact is negative for the Scottish economy if we continue along that road.”

The changes to the tax regime in Scotland flow from new powers being devolved next year as part of the 2014 Unionist ‘vow’ to empower Holyrood if Scotland rejected independence.

Middle earners also face significantly higher council tax charges next year.

Rates for Band E to H properties rise automatically in 2017 under SNP plans to make the tax more progressive, with the largest homes billed an extra £500 a year.

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However Mr Mackay also suggested councils could raise bills across all bands next year to raise £70m for local services.

He said council spending power would increase by £240m, provided councils raised the tax by the maximum 3 per cent when the council tax freeze ends in April.

Councils said they faced a £350m real terms cut once ringfencing and presentational sleight-of-hand were taken into account.

Jenny Laing, convener of the Scottish Local Government Partnership, said: “Derek Mackay has used smoke and mirrors to try and disguise the SNP's slash and burn economic strategy.

“The SNP has just clobbered the tier of government which is closest to the people of Scotland, so it is plain to see who will suffer most.”

She said an extra £60m for more childcare places was welcome but still “woefully inadequate”.

She added: "We would ask all political parties to support local authorities and the ordinary hard-working families we represent, and reject this Budget with the contempt it deserves."

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David O’Neill, president of the council umbrella group Cosla, said: “We can never endorse a reduction to the core local government settlement as announced as part of the budget.

“The Scottish Government had significant additional cash for 2017-18 and therefore this decision will impact on services delivered by local government.”

The Herald revealed yesterday that the Scottish Government had dropped its plan to use the extra £100m a year generated by higher council tax to fund extra school spending.

Mr Mackay said he would instead give £120m a year direct to schools through a new “pupil equity scheme” to help them close the attainment gap between rich and poor pupils, with every P1 to S3 child eligible for free meals bringing headteachers an extra £1200 to spend.

Budget 2017-18: political analysis

The Finance Secretary was praised by many business groups for changes to business rates.

He lifted an extra 100,000 firms out of rates by increasing the threshold for 100 per cent relief, and cut the rate poundage by 3.7 per cent.

He also responded to criticism of the rates supplement on large businesses by increasing the threshold to £51,000, reducing the tax burden on 8000 firms.

Overall, the £30bn budget will be fractionally higher next year than in 2016-17, thanks to new tax and welfare powers making Scotland less reliant on the block grant from Westminster.

But Mr Mackay said the long-term impact of Tory austerity meant Edinburgh’s discretionary spending had fallen by 9 per cent, or £2.9bn, in real terms from 2010 to 2020.

Besides the changes in the 40p income tax threshold, Mr Mackay also confirmed he would keep the additional rate, for those earning over £150,000, at 45p in line with the rest of the UK, rejecting a call from Labour to restore it to the 50p rate last seen under PM Gordon Brown.

Gerry Braiden: Devolution not SNP 'cuts and power grabs' tolled the bell for council powers

Mr Mackay also froze Land and Buildings Transaction Tax, the devolved version of stamp duty, for both residential and non-residential properties; it is forecast to raise £507m in 2017-18.

He said the SNP intended to cut Air Passenger Duty by 50 per cent by 2021, renaming it Air Departure Tax after Holyrood assumes control of it in 2018.

He forecast Scottish GDP would grow by a disappointing 1 per cent this year and 1.3 per cent in 2017-18, compared to its historic 2 per cent a year, because of uncertainty over Brexit.

With no consensus at Holyrood on how to use the new tax powers, Mr Mackay and opposition parties will now discuss possible compromises ahead of the key budget vote in February.

The Finance Secretary urged other parties to back the budget, saying there were “acres of common ground” on which to reach an agreement.

Tory finance spokesman Murdo Fraser said Mr Mackay had an extra £140m from the Treasury next year and huge new powers to deliver growth, yet he had “chosen to hike taxes on families and businesses, risking a choking of economic recovery”.

He said: “The finance secretary is making Scotland the most expensive part of the UK in which to live, work and do business. Local councils also face a real terms cut in their grant of more than £300 million.

"This is a Government which wants to make Scotland the highest taxed part of the United Kingdom. Scots will pay more, but in return get a shambolic mess on education and the NHS.”

Herald View: Mackay’s Budget makes history in a circumspect way

Labour leader Kezia Dugdale said council cuts would “rip the heart out” of public services.

She said: “They’re making up the difference by holding councils to ransom – forcing them to use their tax powers, while they refuse to use theirs.

"This budget passes on Tory cuts to the people of Scotland. It makes Derek Mackay no better than a Tory Chancellor.”

Green co-convener Patrick Harvie said the budget was "a missed opportunity", while LibDem leader Willie Rennie said: “We need transformation and this is not a transformational budget. The Finance Secretary has got miles to travel before we can reach an agreement.”