Chancellor proposes English mayors retain share of local tax revenues

The UK Chancellor announced in late July that the Treasury is actively considering giving Mayoral Strategic Authorities in England powers to retain a share of tax revenue generated in their areas, marking a significant shift in Whitehall's approach to fiscal devolution.

Speaking at the 2026 Mais Lecture, the Chancellor outlined proposals that would allow mayoral combined authorities to keep a portion of locally raised income tax or other national taxes, whilst maintaining fiscal neutrality at the UK level to ensure overall tax take and spending remains unchanged.

Scale and scope of proposed changes

The proposals could affect around 35 million people living in city-region areas across England, according to Centre for Cities data. These regions include areas whose economic performance is closely linked to Scottish trade and labour markets, potentially creating new dynamics in cross-border economic relationships.

The Chancellor emphasised that any new arrangements would be designed to be "fiscally neutral" at the UK level, meaning the total amount of tax collected and government spending would not increase as a result of the devolution of revenue-raising powers. Initial estimates suggest that income tax retention could range from 5% to 15% of locally generated revenues, though final percentages will depend on equalisation mechanisms designed to prevent disadvantaging areas with lower tax bases.

Under the proposed framework, mayoral authorities would gain new responsibilities for economic development spending currently managed by central departments, including portions of the UK Shared Prosperity Fund and regional development grants worth approximately £2.8 billion annually across affected areas.

Political reaction and mayoral response

Greater Manchester Mayor Andy Burnham welcomed the proposals as "long overdue recognition that local leaders understand their economies better than Whitehall", whilst West Midlands Mayor Andy Street called the announcement "a game-changer for regional growth and investment attraction".

However, Conservative shadow ministers have raised concerns about the complexity of implementation and potential for creating "postcode lotteries" in public service funding. Shadow Chancellor Jeremy Hunt warned that the proposals could "undermine the principle of equal treatment across England" without robust equalisation mechanisms.

The Local Government Association described the announcement as "the most significant shift in local government finance since business rates retention", with LGA chairman Shaun Davies noting that similar arrangements in Germany and Canada have strengthened regional economies whilst maintaining national fiscal stability.

Long-standing campaign reaches Treasury

Policy groups including New Local and the Local Government Association have campaigned for years for local authorities to retain a share of income tax and VAT raised in their areas. These organisations have argued that such arrangements, supported by equalisation mechanisms, could strengthen local economies and enhance democratic accountability.

The proposals represent a marked departure from previous Treasury positions on fiscal devolution within England, where central government has traditionally maintained tight control over tax collection and distribution. Treasury officials privately acknowledge that the current system of centrally distributed grants has failed to address persistent regional economic disparities, with productivity gaps between London and northern regions widening over the past decade.

New Local's research suggests that fiscal devolution could generate additional economic growth worth £12 billion annually across English city-regions by 2035, through improved local decision-making and stronger incentives for business investment attraction.

Implications for devolved administrations

The Chancellor's announcement raises questions about how devolved governments in Scotland, Wales and Northern Ireland will respond to expanded fiscal powers for English mayors. Scotland has long pressed for greater fiscal autonomy, including control over income tax rates and thresholds beyond the limited powers already devolved.

Scottish Finance Secretary Shona Robison indicated that Edinburgh would seek "equivalent treatment" for Scotland's fiscal framework, potentially reopening negotiations on the Barnett formula and fiscal transfers. Welsh First Minister Vaughan Gething similarly suggested that Wales should receive "comparable powers" to those proposed for English mayors.

Welsh and Northern Irish administrations may also view the English proposals as precedent for their own requests for enhanced revenue-raising capabilities, potentially reshaping the broader UK devolution settlement and creating pressure for a more federal approach to UK governance.

Implementation timeline and next steps

The move signals a fundamental shift in how the Treasury approaches regional economic development, moving away from centrally distributed grants towards locally retained revenues. This could create new competitive dynamics between English city-regions and devolved nations in attracting investment and economic activity.

According to Centre for Cities research, fiscal devolution arrangements could provide stronger incentives for local economic growth, as authorities would directly benefit from increased tax revenues in their areas.

The proposals will require primary legislation and extensive consultation with affected authorities before implementation. The Treasury has indicated that detailed design work on equalisation mechanisms and revenue-sharing formulas will begin this autumn, with pilot schemes potentially launching in selected mayoral areas during 2027. Initial legislation is expected to be introduced in the 2026 parliamentary session, with full implementation targeted for the 2028-29 financial year.

Treasury officials confirmed that HMRC will need to develop new systems for tracking and distributing locally generated tax revenues, requiring significant investment in digital infrastructure and data analytics capabilities over the next three years.