National Assembly for Wales

Fiscal drag occurs when growth in tax thresholds and allowances does not keep up with growth in taxable income, resulting in more of a taxpayer’s income becoming taxable or taxable at a higher rate. The Welsh Rates of Income Tax (WRIT) account for 10 pence in the pound in each tax band and therefore currently represent a flat rate tax above the personal allowance. The personal allowance will therefore be the only potential source of fiscal drag in WRIT revenues. It is fixed in cash terms between 2023-24 and 2027-28 and so, with rising incomes, there will be a fiscal drag component in the Office for Budget Responsibility’s (OBR) forecast for WRIT in 2024-25.

There are no published numbers on the impact of freezing the personal allowance on WRIT revenues. However, the policy will tend to increase revenues as incomes increase. It is also the case that the frozen personal allowance will increase equivalent revenues in England and Northern Ireland, which will affect the Welsh Government budget via the block grant adjustment. The net budgetary impact of the freeze will therefore be considerably smaller than the increase to the Welsh revenues alone. That said, the OBR’s March 2023 forecasts suggest that WRIT revenues are likely to grow faster than the associated block grant adjustment over the next few years. As noted by the OBR: “the Welsh share of income tax is expected to increase gently over the next few years, thanks in part to the frozen personal allowance raising proportionately more revenue in Wales than in the UK”.