UK Mayors Granted Flexibility to Use Tax Revenue for Resident Grants

Regional mayors in England will have the discretion to use a portion of tax revenues received from the central government to provide cash grants to individual residents and businesses. This flexibility is part of a broader fiscal devolution roadmap unveiled by Chancellor John Healey, who described the initiative as "the most radical act of devolution in a generation."

The plans, set to take effect from April 2028, will see mayors of strategic authorities assigned a share of basic-rate income tax generated within their areas. Additionally, from next year, mayors will receive 20% of locally retained business rates, with a long-term goal of allowing local authorities to retain 100% of these rates by the end of the decade.

Tees Valley Mayor Ben Houchen has indicated he is developing a voluntary scheme he calls a "tax rebate scheme," which would allow local residents to apply for a share of the distributed tax revenue. He stated that Treasury officials have confirmed this approach would be permissible within the government's devolution rules, classifying these payments as grants rather than income tax rebates, which can only be issued by His Majesty's Revenue and Customs (HMRC).

While this increased flexibility aims to empower local leaders to boost economic growth and services, mayors opting to use funds for grants may have less available for other local priorities such as housing and transport. The government's roadmap emphasizes that mayors will not gain the power to set income tax rates or thresholds but will have greater autonomy in spending assigned revenues.

Most of England's 14 strategic authorities are led by Labour mayors who have generally welcomed the move. However, details are still being sought by mayors like Andrea Jenkyns of Greater Lincolnshire and Luke Campbell of Hull and East Yorkshire to fully understand how these tax revenues can benefit their regions.

In addition to income tax and business rates, strategic authorities led by mayors will gain the power from 2028 to introduce an Overnight Visitor Levy, commonly referred to as a "tourist tax." This levy would be an uncapped percentage of accommodation costs. While some mayors, such as those in 10 city regions, have pledged to voluntarily cap this charge at 5%, others, like Houchen, have stated they would not implement it.

The devolution of fiscal powers is intended to address the UK's low share of national taxes collected at a local level, which at 5.8% is the lowest among G7 countries, according to the OECD. Critics, however, have raised concerns about the capacity of local areas to manage such powers effectively and the potential for deepening economic inequalities.

These developments occur as the Tees Valley Combined Authority, led by Houchen, faces a government inspection into its finances due to concerns about its long-term financial sustainability.