The proposals include a new 19% 'starter rate' of income tax for earnings between £11,850 and £13.850, and a new 21% 'intermediate rate' for earnings over £24,000. If implemented, they will raise an additional £164 million in public finances in 2018/19, according to estimates by the Scottish government.
The draft budget also proposes a zero rate threshold on land and building transaction tax (LBTT) for first-time buyers in Scotland, although no further changes will be made to residential and non-residential LBTT rates and bands. The UK government introduced a stamp duty exemption on the first £300,000 worth of first-time buyer residential property in England as part of its budget last month.
The income tax reform proposals meet the four tests set out in a recent Scottish government discussion paper, according to finance secretary Derek Mackay. He said that the reforms would "ensure that the vast majority of taxpayers are protected, that income tax becomes more progressive, that revenues are generated for investment in public services and that - coupled with our spending choices - there will be a positive impact on the economy".
"Our new, fairer income tax policy will protect the 70% of taxpayers who earn less than £33,000 a year and ensure they pay less tax next year for any given income whilst asking those earning more than £33,000 to pay a proportionate amount more to support our public services", he said.
"Our plans also ensure that over half of taxpayers will pay slightly less in Scotland next year than they would in the rest of the UK, protecting low incomes and supporting the economy," he said.
The Scottish parliament will vote on the draft budget in the new year.
The draft budget envisages an increase in the number of income tax 'bands' from three to five, by introducing the 'starter' and 'intermediate' rates. The 'basic rate' of income tax, on earnings between £13,851 and £24,000, will remain at 20%. The 'higher rate', on earnings between £44.274 and £150,000, will increase by one percentage point, to 41%, while the 'additional rate', on earnings over £150,000, will increase from 45% to 46%.
The Scottish government was given full powers over income tax rates payable by people resident in Scotland as part of the 2016 Scotland Act. It has had some powers over income tax since April 2016, although it has not previously chosen to introduce different rates from the ones applicable elsewhere in the UK.
Tax expert Christine Yuill of Pinsent Masons, the law firm behind Out-Law.com, said: "These changes add complexity to the system. They may also cause difficulties for employers who have employees moving between England and Scotland. Employees may expect to be recompensed if a move to Scotland would increase their tax bill."
The draft budget also incorporates public sector pay increases, a new £150 million 'Building Scotland Fund' to unlock new house building and a £4 billion infrastructure investment programme. It also confirms previously-announced reforms to business rates and rates relief, while capping any increases in the rates poundage at the CPI, rather than RPI, rate of inflation.