Welsh rates of income tax reconciliation 2020 to 2021: Joint technical note by Welsh Government and HM Treasury

This statement, jointly agreed by HM Treasury and the Welsh Government, shows both governments’ continued ambition to ensure full transparency in, and to improve wider understanding of, the Fiscal Framework. This statement provides an explanation of how the first income tax reconciliation process affects the Welsh Government’s budget.

Today, HMRC published Income Tax outturn statistics for the tax year 2020 to 2021 .

The figures in this publication provide both the Welsh Rates of Income Tax revenues, and the equivalent Income Tax revenues for the rest of UK that are used to calculate the Welsh Government’s Block Grant Adjustment, as set out in the Fiscal Framework agreed between the Welsh and UK governments. This allows the Income Tax reconciliation applying to the 2023 to 2024 Welsh Government budget to be calculated.

Calculating the reconciliation requires comparing the forecast and outturn figures for the Welsh Rates of Income Tax revenues and for the Block Grant Adjustment. The difference between the forecasts and the outturns is applied to the Welsh Government’s funding in 2023 to 2024. Further background is set out below, after the calculations.

The Welsh Government’s Fiscal Framework sets out that the Block Grant Adjustments are calculated on a 'by band' basis (for each of the basic, higher, and additional rates). The table below summarises the total impact of the reconciliation, while a more detailed presentation of the figures with a breakdown 'by band' can be found in the background section.

The 2 reconciliation components will have the following effects, as summarised in the table below:

• Block Grant Adjustment: The outturn is lower than was forecast at the time of the 2020 to 2021 Welsh Budget so this will reduce the Block Grant Adjustment (and by implication increase the Welsh Government’s block grant) by £78 million in 2023 to 2024.
• Welsh Rates of Income Tax: The outturn is lower than was forecast at the time of the 2020 to 2021 Welsh Budget so this will reduce Welsh Government self-funding by £30 million in 2023 to 2024.

The net reconciliation effect is a £48 million increase in the Welsh Government’s funding for 2023 to 2024.

Note: numbers may not sum due to rounding.

Following the Wales Act 2017, additional tax powers were devolved to the Welsh Government. In April 2019, the UK rates of income tax on non-savings non-dividend income were each reduced by 10 pence in the pound for Welsh residents. The Welsh Government gained the power to set a Welsh rate in each band in Wales. To date, the Welsh Government has set those rates at 10 pence in the pound. HMRC is responsible for the collection of all Income Tax, including the Welsh rates.

The Welsh Government is partly funded by the UK government block grant, and partly self-funded through raising revenue from devolved taxes and borrowing.

The block grant is determined by the longstanding Barnett Formula.

The block grant is now adjusted to reflect the impact of the transfer of greater fiscal powers to the Welsh Government. These Block Grant Adjustments (BGAs) are deductions for tax powers. Alongside this, the Welsh Government retains all revenues from devolved taxes, has a Welsh Reserve and has capital and resource borrowing powers with agreed limits.

For resource borrowing, the Welsh Government has the power to borrow for forecast error in relation to devolved taxes arising from forecasts of Welsh receipts and corresponding UK forecasts for the Block Grant Adjustments, with an annual limit of £200 million.

The revenues from the Welsh rates and the associated BGA used in Welsh Government budgets are based on forecasts produced by the Office for Budget Responsibility. These are both fixed in advance of the year in question.

As set out in the Welsh Government’s Fiscal Framework, Income Tax outturn published in HMRC’s Annual Report and Accounts, which is normally published around 16 months after the end of the financial year, will then be used to determine adjustments to account for forecast error through a reconciliation process. Any adjustments required are then applied to the Welsh Government’s funding for the following financial year.

Under this process, a reconciliation for 2020 to 2021 Welsh Rates of Income Tax will be applied to the 2023 to 2024 Welsh Budget. The reconciliation covers both Welsh Rates of Income Tax revenues and the BGA.

Note: numbers may not sum due to rounding.