Smith Commission: Scottish Parliament should be able to set its own income tax rates

The commission also backed the devolution of air passenger duty, something the SNP has been campaigning for, and suggested a share of cash raised from VAT be assigned to Holyrood.

The Scottish Parliament should be allowed to create new benefits in areas where it has devolved responsibility, but should also be given the power to make discretionary welfare payments in any other area, while a range of benefits that support older people, carers and the sick and disabled could be fully devolved, the report said.

The commission called for legislation to make Holyrood a permanent feature of the UK's political set-up, and proposed it be given powers over its own elections, which could pave the way for 16 and 17-year-olds to vote in Scottish Parliament elections after they were allowed to take part in the independence referendum.

Read the report in full

Commission chairman Lord Smith of Kelvin said: "Taken together, these new powers will deliver a stronger Parliament, a more accountable Parliament and a more autonomous Parliament."

Speaking as the commission unveiled its proposals in Edinburgh, he added: "The recommendations, agreed between the parties, will result in the biggest transfer of powers to the Parliament since its establishment."

Prime Minister David Cameron had announced the establishment of the commission within hours of the result of September's independence referendum.

The contents are the result of more than a month of cross-party talks with representatives from each of the Scottish Parliament's five political parties.

While the SNP, Liberal Democrats, Conservatives and Greens all favour the full devolution of income tax, Labour has officially only backed Holyrood having control over some of the tax, with former prime minister Gordon Brown warning that full control would be a ''Tory trap''.

Lord Smith said today the agreement was "an unprecedented achievement" because it had "demanded compromise from all of the parties".

He said: "In some cases that meant moving to devolve greater powers than they had previously committed to, while for other parties it meant accepting the outcome would fall short of their ultimate ambitions.

"It shows that however difficult, our political leaders can come together, work together and reach agreement with one another. I pay tribute to them for doing just that."

Lord Smith's recommendations, known as a Heads of Agreement, will form the basis of draft legislation due to be published by January 25.

The main parties at Westminster have pledged that the legislation will be taken forward regardless of the outcome of the general election in May.

On benefit, the Commission recommended that all aspects of the state pension should remain reserved to Westminster to ensure these remain the same across the UK.

The new Universal Credit should also remain a reserved benefit, to be administered and delivered by the Department for Work and Pensions, it added. Child benefit, statutory maternity pay and statutory sick pay would also remain under UK Government control,

But it suggested attendance allowance, carer's allowance, disability living allowance and the personal independence payment which will replace it should be devolved, along with industrial injuries disablement allowance, severe disablement allowance, cold weather payments, and winter fuel payments.

While the agreement states there should be "no restrictions on the thresholds or rates the Scottish Parliament can set" on income tax, it said all other aspects of the levy would remain reserved to Westminster, including the amount people can earn before they start to pay.

As income tax will still apply across the UK, it should continue to be collected and administered by HM Revenue and Customs, the Commission said.

The Barnett Formula, which sets out how much public cash different parts of the UK receive, will continue as part of the agreement. The Commission recommended that Holyrood be given additional borrowing powers.

It said this was necessary to "reflect the additional economic risks, including volatility of tax revenues, that the Scottish Government will have to manage when further financial responsibilities are devolved".

The Commission recommended that the management of the Crown Estates economic assets in Scotland and the revenue generated by these should be transferred to Holyrood.

It went on to propose that following this transfer, responsibility could then be given to local authority areas, such as Orkney, Shetland and the Western Isles.

Westminster should remain in charge of licensing for all offshore oil and gas extraction, but Holyrood could get the power to determine onshore oil and gas extraction.

The parties involved in the Smith Commission are also "strongly of the view to recommend the devolution of abortion" as Holyrood already has power over health policy.

The report said that "further serious consideration" should be given to this and a "process should be established immediately to consider the matter further".

Mr Cameron said: "I'm delighted with what's been announced. We are keeping our promises and we are keeping our United Kingdom together.

"I always said that a No vote did not mean no change. Indeed, we made a vow of further devolution for Scotland and today we show how we are keeping that vow and we will continue to keep that promise.

"The Scottish Parliament is going to have much more responsibility in terms of spending money but it will also have to be accountable for how it raises taxes to fund that spending and I think that's a good thing.

"I think the report today also makes the case for English votes for English laws unanswerable and we will be taking action on that shortly.

"I think taken together, this extra devolution for Scotland and deal on all these issues will mean our United Kingdom is stronger."

Mr Cameron said proposals for English votes will be published "before Christmas" and that draft clauses for devolution will be before Parliament in January.

Asked whether the Smith Commission proposals marked a "slippery slope toward the end of the Union", Mr Cameron said: "I don't think it does.

"I think what this report will do is achieve a better deal in our United Kingdom - a stronger Scottish Parliament in particular for raising and spending money but with the responsibility and accountability that involves."

New Scottish Deputy First Minister John Swinney said the proposals would fail to deliver the "powerhouse parliament" the leaders of the Westminster parties had promised in the days immediately before the independence referendum.

Mr Swinney, who was one of the SNP representatives on the commission, said nationalists "welcome the new powers - as we support all progress for Scotland - and pledge to use them when they are in place in the best interests of the Scottish people".

But he said the proposals "clearly do not reflect the full wishes of the people of Scotland" for constitutional change and "also fall far short of the rhetoric from the No campaign during the referendum".

Mr Swinney said: "Regrettably, the Westminster parties were not prepared to deliver the powerhouse parliament the people of Scotland were promised - under these proposals, less than 30% of our taxes will be set in Scotland and less than 20% of welfare spending will be devolved to Scotland. That isn't Home Rule - it's continued Westminster rule.

"As polling has shown, two-thirds of people want Scotland to have all powers apart from defence and foreign affairs - devo max - including majorities among supporters of all political parties; 71% want control of all taxation in Scotland, 75% want control of the welfare and benefits system, 65% want control of policy regarding the state pension, and 68% want control of oil and gas revenues.

"Most significantly, the proposals do not include the job-creating powers that Scotland so badly needs to get more people into work and grow the economy, or welfare powers to tackle in-work poverty.

"Control of employer national insurance contributions, tax incentives for research and development, the personal allowance to lift more low earners out of tax and make work pay, corporate taxation, child and working tax credits, and the ability to shape a welfare system that helps rather than hinders the path to employment - these all stay with Westminster.

"This was a missed opportunity to devolve the welfare system in order to help build a fairer, more prosperous society - as the Scottish Council for Voluntary Organisations and many other expert organisations in civic Scotland called for - and the minimum wage, as the STUC (Scottish Trades Union Congress) wanted."

He added: "We will use all the new powers Scotland gets wisely, to improve the lives of the people we serve.

"But the opportunity of the commission was to make this the strongest package of self-government possible short of independence - which is effectively what the people voted for in the referendum. Unfortunately, this falls short because it could only go as far as the Westminster parties were prepared to go.

"Next year's general election offers the people of Scotland the opportunity to have their say, and the SNP will propose improvements to the package for which we will seek popular support in May. The Westminster parties have now gone as far as they are ever prepared to go in terms of powers for Scotland - and it is not as far as they indicated during the referendum. They have drawn their final line in the sand - and it is on the wrong side of majority opinion in Scotland.

"The general election enables the voice of the people to be heard over the powers that Scotland needs to boost employment and tackle inequality - and we look forward to their verdict."

Deputy Prime Minister Nick Clegg said the three main Westminster parties had fully delivered on promises made during the referendum campaign.

"We have not only delivered on our vow, we have actually over-delivered on it now. Call it 'vow-max' if you like, 'vow-plus-plus'," the Lib Dem leader said on his weekly LBC radio phone-in.

"It shows what can happen when politicians get together and agree across parties to set their differences aside. I think that contrasts quite starkly with the politics of confrontation which you get from the SNP, which wouldn't deliver any of this at all."

Lord Smith said he will scrutinise the forthcoming legislation very carefully but said he has been given a cross-party assurance that his recommendations will be delivered.

"There is nothing sure in politics but I would be very surprised if this is not delivered in full," he told journalists.

"When I took this job on I was assured the leaders of the three Westminster parties were absolutely convinced they were going to deliver.

"When we spoke to the Prime Minister this morning he said: 'We intend to deliver in full.'

"I will be reading the clauses on January 25 very carefully."

He declined to comment on whether "the vow" of substantial devolution given before the referendum had been delivered, insisting the five political parties may have different interpretations.

"Some people feel it doesn't go far enough, some people feel it is very extensive, I am just the referee," he said.

He dismissed suggestions that the Smith Commission was a deal struck in secret, saying he received more than 18,000 emails, including correspondence from 402 civic organisations, and also made personal trips around Scotland to canvass opinion.

He also admitted there were times when he thought he would not reach a consensus.

"Like most good gatherings of Scots, we could be having a right good go at each other and then laughing with each other," he said.

"I never got a sense that anyone was actually going to walk away but there were times when I went home at night thinking 'I'm not going to find a way through this'.

"But I have thought that on nearly every board that I have sat on. There was humour as well as the occasional fiery moment.

"But I'm a glass half-full kind of guy and I thought we would get there in the end, and we did.

"All five signed up - that's historic."

The Smith Commission agreed that nothing in the report prevents Scotland becoming an independent country in the future should the people of Scotland so choose.

It also hands the Scottish Parliament all powers in relation to elections to Holyrood and local authorities - but not the power to unilaterally hold another independence referendum.

"My understanding is that referendum powers are not included," Lord Smith said.

Mr Swinney added: "We welcome the outcome, insofar as it goes, including the acknowledgement of the sovereign right of the people of Scotland and our ability to proceed to independence if we so choose as a country."

Scottish Labour finance spokesman Iain Gray said: "Today is a promise kept for the people of Scotland.

"Before the referendum we made a vow which today we honour - a stronger Scottish Parliament as part of a strong United Kingdom.

"This is real change, these are real powers and they will make our Parliament one of the most important parliaments in the world - and yet this is an agreement that preserves the social and economic union of the nations of these islands."

Lord Smith said the commission delivers "roughly half of all taxation" while Mr Gray said Labour's calculation "leaves around 60% of the Scottish Government's budget paid for by taxes raised in Scotland both under our control and assigned".

Former Scottish Conservative leader Annabel Goldie said: "This is a deal that was designed, built and delivered by Scottish Conservatives with Scottish Conservative beliefs.

"We will have a parliament that will have to look Scottish taxpayers in the eye if it want to spend taxpayers' money.

"I think that is good for Scotland and I think it is good for the stability of the UK."

Former Scottish secretary Michael Moore, who represented the Liberal Democrats on the Commission, said: "Today the Smith agreement gives us home rule for Scotland.

"We are equipping Scotland with substantial job-creating powers, we're creating a Scottish welfare system and at the same time we are ensuring Scotland still enjoys the job and wealth-creating advantages of full integration in the UK-wide economy."

Scottish Green co-convener Maggie Chapman said: "This report gives, at best, some limited powers to stop austerity and it gives many fewer powers for a renewables-led reindustrialisation of our economy than we would like.

"We wanted the devolution of the revenues and powers to end poverty in Scotland, including the power to enforce a living wage and powers over workplace democracy such as those highlighted by the PCS union outside here this morning.

"Those who collaborated to block progress on these issues will answer to those whose expectations they raised during the referendum."

Labour leader Ed Miliband said: "We think it's right to give more powers to the Scottish Parliament. We said during the referendum campaign, we vowed to the people of Scotland that we would do that, and that's what this does - including on income tax.

"I think the task now is to change the way we are governed more generally, not just in Scotland but in England and Wales as well.

"I think it's the right thing to do, we've listened to the people of Scotland just like we are listening to the people in England and Wales about them wanting more power over their own lives."

He insisted that Scottish MPs should retain their power to vote on UK budgets at Westminster: "The system of tax reliefs remains at a UK level, other aspects of the income tax system remain at the UK level.

"I think it's part of the integrity of the UK that it continues to be the place that Scottish MPs vote on the budget. The Smith Commission itself recognises that in their report.

"What this does is it combines the best of both worlds: giving more power to the Scottish Parliament but keeping the pooling and sharing of resources across the UK."

Former prime minister Gordon Brown, one of the key players in the pledge to deliver more powers for Holyrood, said: "The vow to deliver a stronger Scottish Parliament within the UK has been kept, as promised, and the timetable for draft laws to be published in January will now be honoured, as promised."

Liberal Democrat Chief Secretary to the Treasury Danny Alexander said: "This plan delivers all that was promised in the referendum - and much, much more. This is nothing less than Home Rule for Scotland within the United Kingdom, for which Liberal Democrats have been campaigning for generations.

"Lord Smith and all the commissioners deserve our heartfelt thanks for their work in making it happen.

"With control over £2.5 billion of social security, new economic powers, and Scottish taxes paying for the majority of devolved policies, the Scottish Parliament will be financially self-sustaining for the first time."

He added: "We now need to work on an equally radical plan for devolution of power within Scotland. We need to reverse the tide of centralisation of recent years, and give real power back to communities in the Highlands and Islands and across Scotland."

But Mr Alexander stressed: "This is a plan that 100% of Scottish people can unite around, and which everyone who has the best interests of Scotland at heart will now work to deliver. This is a major step on the road to a federal UK which we should all embrace and not fear."

Scottish Labour leadership candidate Jim Murphy welcomed the agreement and said: "This is a historic day for Scotland. Change is coming to our great nation.

"The vow made during the referendum campaign has not only been delivered - it has been exceeded.

"This huge package of new powers is a good deal for Scotland. More decisions about Scotland will be taken here in Scotland, without losing the financial security that comes with the Barnett formula."

Mr Murphy, a former Scottish secretary, continued: "The days of political parties in Scotland promising the earth but blaming someone else for their failure to deliver are well and truly over. There will be no hiding place for those parties which preach social justice but duck for cover when called to act.

"The terms of the political debate in Scotland have now changed entirely. No longer will we obsess about the delivery of powers. That question has been answered today. The debate now moves from powers to policy."

Neil Findlay, who is also running to take over as Scottish Labour leader, said: "Whether people think the Smith commission report represents too much or too little devolution, it is the responsibility of all involved to accept the findings and work at making them law."

Mr Findlay, who is Labour's Holyrood health spokesman, stressed the importance of using the new powers to "change people's lives", adding: "If I am leading a Scottish Labour Government, I'll use existing and new powers to build 50 000 houses for social rent, move people from a minimum to a living wage, deliver new college places replacing those that have been cut, use public sector contracting powers for the benefit of the people, invest in social care, expand childcare places. abolish employment tribunal fees and give communities the power to say no to fracking if they want to."

The Prime Minister's official spokesman was pressed repeatedly over whether "English votes for English laws" proposals would mean MPs representing Scottish constituencies being barred from voting on some parts of the Budget.

Details of the proposals are due to be set out by Mr Cameron before Christmas but the spokesman said that the principle would be that the differentiation would apply to "all financial matters".

Some elements of income tax would remain UK-wide, he pointed out, such as the allowance thresholds and how income was defined - and there would "continue to be a UK Budget".

Asked specifically if MPs from north of the border would be excluded from voting, for example, on a change to income tax bands or rates in the rest of the UK, he declined to give detail of specific plans.

But he added: "Where you see significant areas of devolution, there is an important principle there in terms of English votes for English laws.

"I think the Prime Minister was pretty clear when he was in front of the select committee that he thinks he is going to bring forward proposals which are going to reflect that because that is the fair thing to do."