Welsh Government and Senedd praised for pressing ahead with council tax reform

Martin Shipton

The Welsh Government and the Senedd have been praised by a leading think tank for “grasping the nettle” of council tax revaluation – something governments in Westminster and Edinburgh have failed to do.

A new report from the Institute for Fiscal Studies (IFS) says the most important tax legislation passed in the current Senedd term is for a council tax revaluation in Wales in 2028 and further revaluations every five years thereafter.

It is the intention of the current Welsh Government for these revaluations to be revenue-neutral – redistributing tax bills between properties based on whether their value has increased by more or less than average since the last revaluation in 2005, but leaving the average bill the same as it would be without revaluation.

Whether they are revenue-neutral in practice will depend on the tax rates set by councils following revaluation, which is not fully under Welsh Government control.

The report says: “The Welsh Government and Senedd should be commended for grasping the nettle of council tax revaluation – something which governments in Westminster and Edinburgh have shied away from. It will allow the next Welsh Government, whoever that is, to integrate any changes to the taxes paid by the occupiers of the highest-value properties into a fairer, more up-to-date council tax, rather than as an ugly bolt-on ‘mansion tax’. England and Scotland should take note – and follow Wales’s lead on council tax revaluation.

“However, in several other areas Wales has been a follower on tax policy, mirroring ill-advised tax policies in England.

“This includes a further increase in the supplement those buying a property to rent out or as a second home have to pay in land transaction tax (the Welsh equivalent of stamp duty land tax) from 3% to 5% of the sale price. This further penalises the rental sector – already penalised by many other taxes, such as income tax, capital gains tax and inheritance tax – hurting not only landlords but also tenants.

“As in England, supposedly temporary Covid-19 reliefs for the retail, hospitality and leisure sectors were also repeatedly extended on a year-by-year basis during the current Senedd term. This created uncertainty for both businesses and their landlords. And while aimed at supporting the targeted businesses, the increase in property demand from these businesses as a result will have pushed up rents – shifting much of the benefit to landlords, and hurting businesses in non-targeted sectors.

“The next government, whoever that may be, should develop an integrated strategy for all of Wales’s property taxes – council tax, business rates and land transaction tax – to make the system as a whole fairer and improve economic performance.”

These are among the key findings of the third Welsh election briefing from the IFS, funded by the Nuffield Foundation.

Changes

The report examines the changes made by the Welsh Government to the devolved tax and benefit system over the current Senedd term. With fewer powers than the Scottish Government, there has been less divergence from UK government policy than in Scotland.

David Phillips, Head of Devolved and Local Government Finance at the IFS and a co-author of the report, said: “Wales’s council tax is based on the relative values of properties in 2003 – not quite as horrendously outdated as the systems in England and Scotland but still almost a quarter of a century old. The commitment to regularly revalue properties, if stuck to, will ensure that future Welsh council tax remains up to date and hence fairer. The Welsh Government and Senedd should be commended for taking the lead on what is clearly a thorny issue.

“The next Welsh Government should go further to reform the whole Welsh property tax system to make it fairer and better for growth. Outside council tax, Wales has too often been a follower of bad UK government policy on property tax – further complicating business rates and making land transaction tax even more economically damaging. Building on research undertaken by the current Welsh Government, the next should once again take the lead on property tax reform. On land transaction tax, in particular, it should reverse course and reduce or ideally abolish the tax – making up the revenue from reformed council tax and business rates if need be.”

Limited powers

Tom Wernham, a Senior Research Economist at the IFS and also a co-author of the report, said: “Compared with the Scottish Government, the Welsh Government has relatively limited tax and benefit powers. On income tax, for example, while it can change the existing rates charged on non-savings, non-dividend income, it cannot change thresholds or introduce new bands. This does constrain its ability to precisely target income tax changes – perhaps one reason the current Welsh Government has not yet used its income tax powers. Extending powers to give control over bands and over tax rates on savings and dividends would be the most logical next step of tax devolution, if further devolution were deemed desirable.’

“On benefits, where they have used their powers – for example, on means-tested support with council tax bills or the cost of school uniforms and equipment – Welsh Governments to date have typically made systems both a little more generous and less locally variable than in England. There would be scope to go further under existing powers if the next Welsh Government wanted to – for example, using ‘discretionary housing payments’ to offset policies such as the benefits cap, as in Scotland. But with Wales’s current devolution settlement explicitly ruling out the Welsh Government providing ‘social security’ benefits, it is not clear whether general benefit top-ups such as Plaid Cymru’s proposed ‘Cynnal’ child payment of £10 per child per week for universal credit recipients would in fact be feasible.”

Despite not diverging from the income tax rates set in Westminster, the Welsh rates of income tax are set to generate a net £360m more funding for the Welsh Government’s budget in 2026–27 than if they had not been devolved. This is because the shape of the Welsh income distribution means that the UK government’s freeze in the personal allowance and tax thresholds boosts the revenue from each tax band by a faster percentage rate in Wales than in England and Northern Ireland.

“It is a reminder that, even without changes in tax policy, tax devolution can affect devolved governments’ funding. If the UK government, in future, were to substantially increase the personal allowance (as in the 2010s), the current pattern could go into reverse – with income tax devolution becoming a drag on (rather than a boost to) Welsh Government funding.

Inflation

After accounting for high rates of inflation in recent years, council tax this fiscal year (2025–26) is 1% higher in real terms than in the first year of the current Senedd term (2021–22). This contrasts with real-terms reductions in England (3%) and Scotland (5%) over the same period. The average council tax bill in Wales is similar to that in England (around £1,800 a year), but this represents a much higher share of average property value in Wales (0.75% versus 0.5%).

The threshold for paying land transaction tax on the buyer’s main home (£225,000) is substantially higher than the thresholds in England and Northern Ireland (£125,000) and Scotland (£165,000). The average amount of land transaction tax paid per sale is £5,049 (2.2% of average sale price), which is lower than in Scotland (£6,467 or 2.8% of average sale price) and in England and Northern Ireland (£9,889 or 2.7% of average sale price).

Business rates have been reduced in real terms over the current Senedd, but tax is a higher share of the market rental value of properties in Wales than in England – for example, 50.2% vs 43.2% in 2026–27 for properties with an annual rental value (in 2024) of between £15,000 and £51,000. Like the UK Government, the Welsh Government repeatedly extended supposedly one-off tax cuts (‘reliefs’) for the retail, hospitality and leisure sectors during the current Senedd term.

The IFS states: “From this April, again like the UK Government, it is instead moving to a permanently lower tax rate for retailers occupying properties with a rateable value of up to £51,000, with another one-year relief scheme for cafes, restaurants, pubs and clubs announced at the last minute. The repeated one-off reliefs are bad policymaking.”