A ‘small share' of around 5% of locally-generated National Insurance (NI) revenue should be devolved as part of tax-sharing pilots with leading combined authorities, the Institute for Government (IfG) think-tank has argued in a report.

The report said devolving just 5% of NI contributions revenue on a per capita basis would amount to around £350m for a large organisation such as Greater Manchester Combined Authority.

It read: ‘There is good evidence that associates tax devolution more strongly with improved economic outcomes than devolution of policy levers alone, which at least in part reflects the additional incentives governments have to drive growth when they receive some of the proceeds from it.

'The UK's tax system is unusually centralised, and tax devolution has been a natural progression of devolution in Scotland and Wales over the past decade.

‘We specifically recommend the devolution of a small share of revenue from NI contributions, as this is the tax most closely linked to local employment, and therefore the best way by which combined authorities can be given a direct fiscal incentive for the creation of new jobs within their region.

'This could give local leaders a substantial source of stable revenue.'

Co-author of the report, Akash Paun, said: ‘NI and income tax are quite closely related taxes and there are lots of other fiscal devolution ideas floating around but this strikes us as a good place to start.'

The cross-party Social Market Foundation (SMF) previously envisioned income tax ‘potentially being partially devolved across regions or local authorities in England'.

A recent SMF report read: ‘Devolved income tax and corporation tax are within the realms of possibility, enabling tax competition among authorities attempting to win over businesses and talented individuals.'

However, Association of Public Service Excellence chief executive, Mo Baines, said income tax devolution could lead to tax avoidance, which ‘cuts through the fairness principles but at the same time creates complexity in collection and distribution systems'.

Despite these reservations, a sector figure who has had conversations with the Treasury about devolving income tax, said: ‘It's just not going to go away as an issue.

'The external environment will not cool down about it.

'There is a clamour for it.'