Full control over income tax rates and thresholds among Scotland Bill tax and welfare proposals

The Scotland Bill would, if approved in its current form, deliver on the Smith Commission agreement backed by Scotland's main political parties after the country voted against independence in a referendum in September last year. The UK parliament intends to pass the bill by early 2016, which would allow parties to set out what they intend to do with the new powers ahead of the Scottish parliamentary elections in May 2016.

Scottish secretary David Mundell said that the new legislation would make the Scottish parliament one of the most powerful devolved parliaments in the world.

"Scotland will still hold on to the benefits of being part of the UK that people voted for in the referendum last September," he said. "Sharing risks and resources with the rest of the UK is good for everyone in the UK when it comes to vital matters such as pensions, currency, trade and national security."

"This bill will ensure we have the best of both worlds and a strong Scotland within a strong UK. The government intends to prioritise this legislation and have it approved by parliament so that in the run up to the Scottish parliament election in May 2016 Scottish voters will be entitled to know what each party intends to do with these extensive new powers," he said.

Tax expert Karen Davidson of Pinsent Masons, the law firm behind Out-Law.com, said that although the new bill provided the "foundation for further devolution of tax in Scotland", some questions remained about its content.

"These include how the timing of powers in relation to income tax will interact with those powers which were devolved under the 2012 Scotland Act and the appropriateness of the definition of Scottish taxpayers," she said. "Scottish taxpayers and businesses can expect some additional complexity to accompany the devolved powers and will be interested to see whether SNP calls for further devolution of tax powers, including business taxes, gain further traction," she said.

If approved, the Scotland Bill would give the Scottish parliament full control of income tax thresholds and rates on earnings in Scotland, and allow it to keep all the money raised in Scotland. This would allow it to, for example, set a new top rate of income tax beyond the existing 45% UK higher rate without also having to increase the existing basic and standard rates. The Scottish parliament will take control of powers to set income tax in 2016, when the UK basic rate for Scottish taxpayers will be reduced to 10p. The Scottish parliament will have to set a rate to generate its own income

The bill would also provide the Scottish parliament with the first 10% of standard rate VAT and the first 2.5% of reduced rate VAT raised in Scotland, with a corresponding reduction in the block grant that Scotland receives from Westminster. This would amount to half the VAT raised in Scotland at the current rates. The Scottish parliament would also take over responsibility for setting and collecting air passenger duty and the aggregates levy in Scotland.

Powers over capital gains tax, corporation tax, inheritance tax and national insurance would remain reserved to the UK parliament under the terms of the agreement. In addition, the UK parliament would continue to control the personal allowance as well as taxation of savings and dividend income, the definition of income and the ability to introduce and amend tax reliefs.

The bill would also give the Scottish parliament control of the onshore oil and gas licensing regime, powers to tackle fuel poverty and impose obligations on energy suppliers to address carbon emissions, give it "significant" new responsibilities over road signs and speed limits, and allow it to restrict the number of new fixed odds betting terminals in Scottish bookmakers.

The legislation would also enshrine the permanence of the Scottish parliament and Scottish Government in UK law, and give the Scottish parliament and Scottish ministers increased responsibilities in relation to a range of welfare benefits. These powers, which are estimated as being worth around £2.5 billion, mainly relate to benefits affecting carers, disabled people and the elderly, and to the frequency of Universal Credit payments.

The Smith Commission also recommended that additional borrowing powers be devolved to the Scottish government, to reflect the additional economic risks of the new devolved powers. These will be agreed between the UK and Scottish governments as part of a new fiscal framework for Scotland, to come into force alongside the new Scotland Bill, according to the UK government.