The Centre for Cities thinktank has proposed replacing central government grants for mayoral authorities, including London, with a mix of income and corporation tax sharing, a move that would give Mayor Sir Sadiq Khan greater control over City Hall's finances. Under the plan, London would retain 2.3 per cent of income tax raised in the capital and 0.8 per cent of corporation tax, matching the current grant of £2.16 billion per year for the Greater London Authority (GLA) – equivalent to £237 per Londoner annually.
Current funding model under scrutiny
Seven of the 14 Mayors in England, including Sir Sadiq Khan, currently receive Integrated Settlements – a single grant supporting funding across economic policy areas such as transport, skills, employment support, and housing. These grants amount to almost £5 billion per year collectively for mayoral strategic authorities (MSAs).
Ministers have already committed to ensuring MSAs retain a share of locally-generated income tax receipts and have promised greater retention of business rates. However, the Centre for Cities report argues that the government should go further, recommending that income tax provide the bulk of funding for mayoral authorities, describing it as the "workhorse of the local finance system."
Corporation tax as a growth incentive
The report suggests that corporation tax should be the "carrot" of the local finance system – representing a smaller share of local funding but exempt from equalisation, meaning there is no ceiling on how much can be retained, albeit capped at 0.8 per cent. This would provide the strongest possible growth incentive for MSAs.
Oscar Selby, an analyst at Centre for Cities, told the Local Democracy Reporting Service (LDRS) that the changes would allow the Mayor to "have much more control" over City Hall's finances. "Any increase in the local tax base – thanks to local economic development and pro-growth policy measures – will lead to a direct increase in resources – meaning more funding for public transport, housing and local services that are currently partly funded by a flat cash grant from Whitehall," he added.
Selby also noted that if the capital wants to borrow money from that pot to accelerate new development projects, it would have a direct source of revenue to act as a guarantee on any lending. "We won’t see the Mayor going cap in hand to the Chancellor for new sources of revenue," he said.
Political support and calls for devolution
Bassam Mahfouz, Labour's Oversight Spokesperson on the London Assembly, said: "London is the engine of the UK economy. But too often we find ourselves [going] cap in hand to Whitehall for access to the funds that we generate. Whilst more power being devolved to a local level is important, without the ability to raise the funds to match, it's meaningless."
Mahfouz added: "Greater fiscal devolution must be a central part of any new devolution deal. As discussions continue ahead of the Autumn Budget, I support calls for London to have more revenue-raising powers of its own and the ability to retain more of the taxes raised here." He agreed it would give the GLA "much-needed control over how we invest in the change people are calling for on housing, transport and public services, whilst helping to drive good growth across every postcode in our great city."
Equalisation and business rates reform
As tax receipts grow, the report recommends a 'Swiss style' system of distributing money around the various mayoral authorities, whereby a levy is placed on any income tax revenue above a defined threshold. Redistributing this cash annually would ensure poorer areas aren't left behind.
The authors also propose business rates reform to provide an incentive for Mayors to stimulate economic growth. In London, a bespoke arrangement is currently in place that reduces central government’s share of business rates to 33 per cent, gives the GLA 37 per cent, and the London boroughs 30 per cent. The report suggests that ministers should devolve their share to all MSAs, as is currently done in the West Midlands and Greater Manchester.
"At present, the highly centralised local finance system is designed around the principle of equalising funding between places according to the gap between local need and their local tax base," the report says. "This penalises places that successfully deliver good growth in their postcodes. A place becoming more prosperous and growing its tax base sees reductions in grants from central government."
The proposals would see an estimated £21.5 billion devolved to Mayors over four years to 2030, assuming historic growth rates. Under the plans, London would receive £996 in devolved income and corporation tax income per head.
The Mayor of London has long called for the capital to retain more of the income tax revenue it raises. In 2019, a City Hall report revealed that London retains "barely six per cent of all the tax paid by Londoners and businesses, compared to 50 per cent in New York and 70 per cent in Tokyo." Officials said: "One of the best ways of maintaining shared prosperity across the country is to give city regions more control over tax revenues."
At the moment, London contributes about £4 in every £10 that the government raises, while five per cent of all tax revenue raised in England stays with Mayors and local authorities and 95 per cent goes directly to Whitehall. MSAs are unlikely to get tax-raising powers under the current government, despite the Prime Minister's push for extensive devolution. However, earlier this month plans to roll out an overnight visitor levy could give Mayors the ability to raise millions by early 2028, with local leaders able to bring in a levy as a percentage of the cost of hotels, bed and breakfasts and other types of accommodation rather than a flat fee – in London, this is not expected to exceed five per cent.
