Scottish Labour is to announce plans to restore tax credits for 350,000 working families in a bid to outflank the Scottish National party over the new tax powers coming to Holyrood.



Kezia Dugdale, the party’s Scottish leader, will tell delegates at the party’s annual conference that she would pay for the new policy, forecast to cost £440m by 2021, by resisting tax cuts being proposed by the SNP and the Tories.



The proposal is designed to pile pressure on John Swinney, the Scottish finance secretary and deputy first minister, after he said his government could not afford to reverse the abolition of tax credits by the UK government or restore all the UK government’s welfare cuts.



It signals the start of a highly-charged contest before next May’s Holyrood election between Scotland’s parties over the use of new tax powers for Holyrood, including the power to set and vary income tax rates from April 2017.

“It’s easy to rail against austerity, to pose as a socialist when no one ever asks you how you will pay for the fairer future you claim to believe in,” Dugdale is due to tell delegates in her main conference address on Saturday.



“The political posturing has to end with the new powerful Scottish parliament and the power for change. A fairer Scotland isn’t one where everyone pays more tax. In fact, we want hundreds of thousands of working Scots to pay less tax.”



She said that reinstating tax credits would discomfort the Scottish Tory leader, Ruth Davidson, who has made clear several times this month that she is worried by the impact of George Osborne’s policy on working families.



“In a few weeks, just before Christmas, families will find letters on their doormats telling them how much they are going to lose,” Dugdale will say.



“After months of supporting George Osborne, Ruth Davidson is now trying to distance the Scottish Tories from him. She knows this unfair Tory tax rise will be as unpopular for her next year as the poll tax was for previous generations of Tories.”



Dugdale will tell delegates in Perth that retaining tax credits would be affordable without increasing taxes in Scotland. It would be funded by rejecting the SNP’s plans to first cut and then phase out air passenger duty (APD) and resisting Tory plans to raise the threshold for the 40p tax rate from the current £42,385 to £50,000 by 2020.

Labour said the Scottish government’s own calculations showed Holyrood would lose £125m by cutting APD by 50% – a key SNP policy during the independence referendum campaign designed to stimulate tourism and business travel. The cost of abolition, the SNP’s stated goal, would be £250m.

Tory proposals to raise the 40p tax band ceiling to £43,600 in 2016 would cost Holyrood £80m a year and its manifesto pledge to push that ceiling up to £50,000 in this parliament would cost Holyrood £440m a year.



Scottish Labour faces two key hurdles before it can reinstate working family tax credits. Labour is highly unlikely to win May’s election unless it overturns a huge gulf in popularity.



It languishes 30 points behind the SNP in Holyrood opinion polls, at 22% compared with the SNP, which is above 50%. Those polls imply Labour could lose all of its Holyrood constituency seats to Nicola Sturgeon’s party and rely on top-up list seats.



It remains unclear whether the UK government will agree that Holyrood does have the legal powers under the new income tax arrangements being set out in the Scotland bill to directly reinstate working families tax credit.



It is thought Labour would need to design and fund a new benefit under its new welfare powers to plug the gap or find another way to top up lost credits.



The Scotland Office has said this could be possible. It said: “Holyrood will be able to top up payments to people in Scotland who are entitled to a reserved benefit.

“These payments will be in addition to the reserved benefits and will allow the Scottish government to provide extra money to people on reserved benefits where they consider it necessary.”



Dugdale will tell delegates: “Before the UK elections, our opponents said there was no difference between Labour and the Tories. I hope they can see the difference now: a Labour government introduced tax credits, a Tory government cut them.

“At the Scottish elections, if people ask what is the difference between a Scottish Labour government and an SNP government this is the difference: a Scottish Labour government will restore tax credits; an SNP government, left to their own devices, would leave the Tory cuts in place.”

