Middle class Scots hit by tax rise and interest rate hike

However the Bank said more increases are expected as it tries to control surging inflation.

Rises mean better returns for savers and retirees buying annuities.

The move coincided with Nicola Sturgeon publishing a long-awaited discussion paper on income tax, which said her government intended to raise “additional revenue” in 2018/19.

It set out four illustrative options, most of which envisaged Scots earning above £24,000 paying more in income tax to help pay for public services.

Someone on a £40,000 wage would pay up to £160 more, someone on £70,000 up to £460 more, and someone on £120,000 up to £1600 more, although the bills would fall by around £70 if Chancellor Philip Hammond increases the personal allowance in this month’s budget.

Most scenarios included the top rate rising from 45p to 50p for those earning over £150,000, something the SNP has previously resisted in case high-earners quit Scotland.

All the proposals are intended to ensure the low paid avoid any tax increase.

They range in complexity from keeping the three current income tax bands to having six, with the changes raising between £80m and £290m a year.

Ms Sturgeon said that an ageing population, Westminster austerity and Brexit made “tough choices” inevitable, and indicated the middle classes would have to foot the bill.

Launching the paper in Edinburgh, she said: “We must consider if the time has come for those who earn the most to pay a modest amount more.”

She stressed none of the options was yet a firm policy proposal, and the document was intended to stimulate debate among the Holyrood parties ahead of the budget.

But she added the relatively generous “social contract” in Scotland, such as free university tuition and personal care, had to be maintained and it was right to consider “modest additional contributions to protect the things we hold dear”.

She suggested 70 per cent of adults would not see any increase in their tax bill.

The SNP manifesto for the 2016 Holyrood election promised to freeze the basic 20p rate of income tax levied between £11,500 and £43,000 throughout the current parliament.

Ms Sturgeon said she was ready to dump the pledge, arguing her minority government would be unable to pass its budget unless it was ready to compromise.

She also urged other parties not to stick “rigidly” to their previous positions.

She said whatever cross-party plan emerged from budget negotiations would have to be progressive, avoid rises on the low paid, protect public services and support the economy.

The Fraser of Allander Institute, the respected economic think tank, said the potential tax rises would not offset even half of the Westminster budget squeeze looming over Holyrood, and public services in many areas still faced “substantial” cuts.

“There remains a gulf between the government’s spending challenge and the role that income tax changes can play in addressing this,” it said.

The SNP-Green budget earlier this year made Scotland the highest taxed part of the UK by freezing the 40p threshold while it rose in England and Wales.

The Scottish Conservatives said reinforcing Scotland‘s position as the highest taxed part of the UK was a massive backward step that could deter workers and investment.

Business leaders also warned against tax rises squeezing spending and damaging trade.

The issue dominated First Minister’s Questions, where the Tories demanded an independent economic assessment of the impact of tax rises.

Labour said the proposals didn’t go far enough to correct austerity, while the Scottish Greens took credit for much of their thinking being embedded within the tax paper.

Tory finance spokesman Murdo Fraser added: “None of the tax raising plans will increase public spending by a huge amount - but they will all add to the growing perception that Scotland is a high tax country.”

Green co-convener Patrick Harvie said no change was now “the least likely option”.

He said: “Greens have been pushing hard to make use of Scotland's new income tax powers and it's hugely significant that the Scottish Government is now looking at options which are more creative than simply tinkering with the basic rate as some parties have suggested.

“We have forced a serious examination of the principle of more, fairer rates and bands. “Sticking with the system we've got is clearly now the least likely option.”

Labour’s Jackie Baillie said the proposals didn’t come close to offsetting Tory austerity.

She said: “There is a black hole in the budget and more services would end up being cut. "We have before us a tax plan that doesn't add up and a list of commitments she [Ms Sturgeon] knows she can't pay for," she said.

The Chartered Institute of Taxation warned a “markedly different income tax regime north of the border” could see high-earning individuals and businesses relocating south.

Seven of the nine members of the Bank’s Monetary Policy Committee (MPC) voted for the rate rise, justifying it after Brexit-fuelled inflation hit a five year high of 3 per cent.

The Bank said future rate rises would be at “a gradual pace and to a limited extent”.

Governor Mark Carney said that without a rise inflation was unlikely to return to its 2 per cent target as the economy was growing “above its speed limit”.

He also said he expected banks to pass on the rate rise to savers.

“Banks did pass on the cuts to their depositors, and we expect competition to push it in the other direction. Obviously, we watch it closely.”

Andrew Sentance, senior economic adviser at PwC, said: “The MPC decision is an important signal to the public that the era of very low interest rates is coming to an end. Further interest rate increases should be slow and gradual, but this is the first step along that road.”

The pound fell about 1 per cent against the dollar and euro on the back of the rise.