Welsh Government to take responsibility for Welsh Rates of Income Tax

The Welsh Government is now to take on responsibility for Welsh Rates of Income Tax from April 2019. This allows the Welsh Government to cut or raise tax rates by 10p within each tax band, with no requirement for a referendum. The proposed devolved powers appear to be a more limited version of the Scottish tax model.

However, before this is implemented, the National Assembly will have to pass a Legislative Consent Motion allowing the whole of the Wales Bill to proceed. We have been monitoring the progress of the Wales Bill closely (see our blogs- Draft Wales Bill and The Wales Bill: A Legal Update), particularly given the concerns that a substantial number of powers remain reserved to Westminster.

This is not the first power granted on tax, with Land Transaction Tax to take effect in April 2018, replacing the UK Stamp Duty Land Tax in Wales (see our recent blog on Land Tax). Finance Secretary Mark Drakeford has welcomed the change stating that it “is an agreement which is fair to Wales and the rest of the UK”. In addition, Drakeford said that “crucially it protected our budget from the range of undue risks that could arise following the devolution of tax powers from 2018 and provides additional flexibility to manage our resources.” Stephen Crabb has also called it a ‘landmark’ settlement for Wales, as the Welsh Assembly will become accountable for the people it serves.

In addition to this change, the amount the Welsh Government can borrow for capital spending will double to £1billion. This is alongside the agreed budget, currently around £15bn a year, which comes in an annual block grant from the treasury.

It is proposed that the new powers will be used to lower the rate of the higher tax band. Whilst the vast majority of Welsh citizens pay the basic rate tax, this reduction is still likely to raise sustainable funds. However, it is questionable whether those funds could justify the potential political uproar. It has been argued that instead of lowering the higher tax band, that Wales should be looking at reducing the number of people required to pay tax by lowering the basic band threshold. The long-term benefits would be to decrease the number of people on benefits and encourage more people to seek employment.

As with all Welsh Law updates, we will be keeping a close eye on the progress of the increased tax powers to Wales.