MS, Cabinet Secretary for
Finance and Welsh Language: Since April 2019, Wales has had the
power to set Welsh Rates of Income Tax. However, since then,
taxpayers in Wales have paid the same level of income tax as
taxpayers in England and Northern Ireland.
The partial devolution of income tax has had a significantly
positive impact on the revenue available to the Welsh Government
to support public spending over this period. This is because the
income tax base in Wales has grown more rapidly than it has in
England and Northern Ireland. As a result, the Welsh budget in
2026-27 is £360m higher than it would have been without the
partial devolution of income tax.
This is in stark contrast to the claims made by some that income
tax devolution would have a negative impact on Wales' fiscal
position.
However, this period has also exposed the limits of partial
devolution of income tax. To raise substantial revenues either
requires an increase in the basic rate, which impacts most on
people on modest incomes, or very large increases to the higher
or additional rates, which could potentially have significant
behavioural impacts and erode revenues. Any reductions in rates
would reduce revenues and undermine investment in Welsh public
services at a time when public services are under significant
pressure.
In March 2025, I commissioned independent research to look at the
options for alternative measures of income tax devolution. The
research team from the Fraser of Allander Institute and Bangor
University have today published their Future options for income
tax devolution in Wales report. I would
like to thank the team for the quality and clarity of their
analysis.
The analysis highlights there is no single, optimal system of
income tax devolution. Any change would have to balance appetite
for greater policy control and flexibility with appetite for
risk. Greater ability to vary rates and bands carries greater
risk.
The research demonstrates that a more comprehensive form of
devolution increases both the risks and rewards if the taxbase in
Wales grows at a different rate to that elsewhere in the UK,
particularly at the top end of the income distribution.
The analysis also highlights the importance of considering the
specific design of the Block Grant Adjustment (BGA). There is no
“correct” form for a BGA and no form comes without risk and
opportunity. However, the researchers demonstrate the nature of
those risks and opportunities differs with the form of the
BGA.
The increased exposure to risk that comes with more control over
income tax would need to come with improved tools to manage risk.
A point would be reached where the current fiscal flexibilities
available to the Welsh Government would not be sufficient to
enable proper financial management if the Welsh budget was
exposed to greater variation in the net position from income tax.
Any change to income tax in Wales requires discussion and
negotiation with the UK Government and legislation in the UK
Parliament, with the consent of the Senedd. The current Welsh
Rates of Income Tax were the product of a lengthy process of
debate and development, including the Silk Commission's first
report, the Wales Act 2014, and the Wales Act 2017.
This Report is therefore published as a contribution to any such
future debate.
