Senedd backs income tax rates freeze for Wales

Under devolved powers 10p of the rate in each of the three income tax bands goes directly to the Welsh Treasury to be spent by the Welsh government. The Welsh government, with Senedd approval, have the power to vary these rates, raising or lowering the amount raised. However, unlike the Scottish government and Parliament, they do not have the power to adjust tax bands or create new ones.

The Welsh government has not so far chosen to use its powers to vary income tax, though it has used other tax powers, for example replacing stamp duty land tax with a land transaction tax which differs from SDLT in some ways.

The debate, which took place on Tuesday 5 March, was one of three related debates that day. The Senedd also debated and agreed the final Welsh Budget for 2024-25 and the Welsh local government settlement.

Here is a summary of the debates.

Welsh rates of income tax 2024-25

Rebecca Evans, Minister for Finance and Local Government in the Labour administration, highlighted that the Welsh rates of income tax (WRIT) are estimated to raise over £3 billion in the next financial year.

The minister defended the government’s decision not to vary the rates, saying: “Our income tax base is relatively weak which means any significant change to our resources through income tax rises would require an increase to the basic rate”. With people in Wales being “challenged every day with the cost of living” she did not believe that now was the right time to increase the tax burden.

Evans blamed the UK government's decision to freeze income tax thresholds for ‘dragging’ more of the lowest earners into the income tax system.

Increasing rates now would, she said, add “an additional tax burden on those least able to afford it”.

The minister said that, looking ahead, the government would “be guided by our tax principles that commit us to designing clear and stable taxes that deliver our progressive agenda. Those with the broadest shoulders should pay a greater share.” She added that making the most of devolved tax responsibilities means working closely with HMRC on the administration of Welsh rates of income tax. She added that: “the robust processes and governance arrangements with HMRC provide a strong basis for the effective and efficient collection and administration of WRIT, going forward.”

Peredur Owen Griffiths (Plaid Cymru) recognised the government’s rationale for not adjusting the Welsh rates of income tax for the sixth consecutive year, however he regretted that “the inability of the Senedd to set its own tax bands, in contrast to the powers enjoyed by the Scottish Government, means that, in practical terms, the Welsh rate of income tax is inherently limited as a fiscal lever.” He continued: "[O]nce again we are forced to reflect on what might have been if we had the powers to create an income tax framework actually tailored to the nature of our tax base.”

The Plaid spokesperson urged the government to “redouble its efforts in laying the groundwork” for the Senedd to be in a position to utilise more devolved powers soon. “Scotland has shown the way with their progressive approach to income tax; there's no reason why we can't do the same,” he declared.

Labour backbencher Mike Hedges was the only other speaker in this debate. He supported the government’s decision not to vary rates and, similarly to Griffiths, expressed disappointment that the Senedd has “no power to alter these [income rate] bands”. “This would be a different debate if we had the power to set the bands—an entirely different debate,” he said.

Given the powers the Senedd has, Hedges saw no attractive options. Increasing the basic rate by 1p would bring in between £250 million and £300 million but would be ‘very unpopular’. Decreasing the rate by 1p would reduce the Welsh government's income and “budgets are stretched already”. “While superficially increasing the additional rate from 45 per cent to 50 per cent appears attractive… there are only 500 of these taxpayers in Wales,” he reflected, adding that these are the people most able to move to dividend income and register a property in England as their main home. “If 11 per cent of them do either of those, then the increase is wiped out. That is 55 people making that decision.”

Hedges said he would like to see Welsh government “control over tax bands, and dividend income devolved and then treated the same as other income for tax purposes”. He suggested the Treasury and the Welsh government are losing billions of pounds by people being paid in dividends rather than normal income. “Because dividend taxation is much lower, you can save lots of money”.

Replying to the debate, the minister, Rebecca Evans, emphasised that any changes to devolved taxes need to be ‘carefully examined’. She suggested that the way in which income tax is devolved to Wales reduces “the risks associated with the different income distribution” compared to England and Northern Ireland. She highlighted that with only 10p per band devolved, UK government changes can't create differing tax rates between Wales and England, unlike in Scotland.

Evans said it was worth bearing in mind “that, over the years for which outturn is available, WRIT has added more per person to the Welsh government budget in net terms than Scottish income tax has added to the Scottish government's budget over the same period.” She added that, “if we were to increase tax at the very top end here in Wales, it would bring in only an additional £5 million, and we are very aware of behavioural impacts that might take place as well.”

She told Senedd members that, if the UK government changed income tax rates in the forthcoming UK Budget, there would be no impact on the block grant adjustment, and any changes the Chancellor made would apply to taxpayers in Wales too.

No Senedd member objected to the motion to leave the Welsh rates of income tax unchanged, and it passed without a division.

Final Welsh Budget 2024-25

Regarding the Welsh final Budget, the Minister for Finance and Local Government, Rebecca Evans, said that the government has listened to the key messages during the scrutiny process and has made some changes. Information from the UK government allowed her to make almost £190 million of extra allocations, she told the Senedd. This included an extra £10 million to strengthen apprenticeship and employability programmes and a new £20 million fund to help small and medium-sized businesses futureproof their businesses.

Peredur Owen Griffiths (Plaid Cymru) said it was regrettable that the Senedd was voting on a final budget a day before a major fiscal event at Westminster. He suggested this showed the UK Treasury was not treating the Senedd with respect. Griffiths regretted what he considered the ‘limited’ nature of changes made to the Budget since the draft version.

Peter Fox (Con) welcomed some of the extra spending but argued that the Budget failed to tackle many issues that families and businesses are facing.

Plaid Cymru leader Rhun ap Iorwerth noted what he called a “clear cross-party consensus in the Senedd that the current fiscal framework for Wales is simply not fit for purpose.” He sympathised with the position the Labour administration were in, but felt that shouldn’t prevent them securing “a firm commitment that Wales will be funded fairly should there be a UK Labour government. The silence on that is still deafening.”

Welsh Lib Dem leader Jane Dodds criticised the ‘outdated’ Barnett formula, but Conservative MS Gareth Davies said Barnett provides a “disproportionately higher amount of funding for health and education in Wales”, blaming Labour for spending the money on “ideologically driven vanity schemes” instead.

The Budget passed in a vote by 28 votes to 15. Conservative Senedd members voted against, while Plaid and the sole Lib Dem abstained.

Local Government Settlement 2024-25

The debate on the local government settlement highlighted disagreements over council tax increases in Wales.

James Evans (Con) said that there has been a ‘huge’ increase to council tax across Wales and people are paying more for the services that are ‘being slashed’. He emphasised consulting with taxpayers when it comes to council tax rises, saying: “We would like to see, on these Welsh Conservative benches, any local authority that proposes a council tax rise over 5 per cent holding a local referendum for their tax rises”.

Peredur Owen Griffiths (Plaid Cyrmu) observed that Conservative-run Monmouthshire County Council increased their council tax above the Wales-wide average, but did not feel the “need to refer that decision to the local electorate”.

The Conservative finance spokesperson, Peter Fox, said that Welsh families are paying an average increase of 8.28% in council tax. He continued: “The government knew perfectly well that councils would have to pass on their pressures onto their residents through council tax or face cutting services”.

Mike Hedges (Lab) asked for business rates to be returned to local authorities, arguing that before centralisation of the rate, local authorities used to raise a much higher proportion of their income locally.

Responding to the comments of Senedd members, the minister, Rebecca Evans, recognised that the settlement does not match inflation or the ‘increasing demands’ on councils, but argued that “this settlement does build on what have been improved allocations in recent years”.

On Hedges’s remark regarding business rates, she said that the government is undertaking some work looking at ’rates retention for the city and growth regions’.

The minister acknowledged the impact of the increase in council tax on taxpayers, but said she believed imposing arbitrary caps on local authorities is not the answer. She stated that the government is acting to improve the fairness of council tax, arguing that the council tax reduction scheme provides support to households.

Senedd members first voted on two Conservative amendments to the motion – one regretting “the substantial increases in council tax due to underfunding by the Welsh Government” and the other calling on the Welsh government to commission an independent review of the Welsh local government funding formula and to require any local authority proposing a council tax rise of over 5 per cent to get it approved in a local referendum. Both were rejected with only Conservative MS’s voting in favour.

The local government settlement was then agreed by 28 votes to 15.

You can read the full debates here.