Sixteen years after the council tax replaced the poll tax, the replacement itself is seen as unfair, and pressure has built for further change. The SNP wants a local income tax, arguing that would be fairer.
Yesterday, Finance Secretary John Swinney set out his plan, with some options. His task doesn't look easy. What's the idea? Council tax would be killed off in March 2011. From the following month, Scottish residents would be charged 3p in the £1 on basic and higher rate income tax, but not on the personal allowance (at today's rates) of the first £5435 earned.
Council tax raises more than £2bn in revenue, and a 3p rate is reckoned only to raise £1.7bn. The gap in council budgets would be filled by an increased grant from Holyrood to local authorities. Is it local and is it based on income? It would pay for local services, but would not be set locally. There would be a uniform rate of 3p throughout Scotland, unless LibDems can persuade Mr Swinney to allow councils to vary the rate slightly. That would cost government and businesses a substantial amount in administration, particularly an employer whose staff could face 32 different payroll tax rates.
The plan is not based on all income. Unearned income, meaning savings and investment income which represents about 9% of the total, would not be covered. Those with enough wealth to avoid earning a living would pay nothing. Does the Scottish Parliament have enough powers? MSPs can decide on the system of local taxation used. It can also vary tax on the basic rate of income tax by plus or minus 3p. But that is not the power it is proposing to use for councils.
The catch is that Holyrood would need Westminster to help it on two counts. One is council tax benefit, which is worth £391m to 533,000 welfare claimants' households in Scotland this year, rising to £430m by 2011. UK ministers are refusing to release that money to Holyrood in a block, which could be used to offset the costs of introducing local income tax.
The other catch is that Scottish ministers do not want to run their own tax collection agency, as that would be costly. It would also require Scots to fill in an extra self-assessment form, and would add to employer payroll costs. So it makes sense for this tax to be raised by HM Revenue and Customs (HMRC). Who wins? With some broad assumptions, the Scottish Government reckons any household with income below £58,000 should be better off. The lowest earning 10% would see a 5.7% increase in income, a middle earner would be 3% up, and the top 10% would be 1.2% worse off.
Applied to typical households, the typical married pensioners would see a 3.4% increase, or £13.80, and single pensioners would be 3.3% up. One-parent families would be 1.7% better off. What about business? It is sceptical, and dislikes the payroll implications of 32 councils having different tax rates. The 3p rise in income affects a lot of smaller businesses that are not eligible for corporation tax. If they are not paying council tax, their income tax bills go up around 15%. What about second homes? They would still be liable to a charge, broadly in line with current council tax, possibly variable between councils. Will it fly? The excuses are already prepared. If Whitehall doesn't kybosh the plan, the LibDems could. And even if LibDems are persuaded to support it, the SNP would still be two votes short of a majority. Greens show no sign of support and Labour and Tory opponents are digging in.
How to calculate new payment Step one: Deduct your personal allowance from your gross annual salary - that is the amount you get paid before any taxes have been deducted. Step two: Calculate 3% of this figure. One way of doing this is to divide the figure by 100, and then to multiply it by 3. Example (2008-09) You have a gross income of £20,000. You deduct your personal allowance, which is £5435, leaving £14,565. You then calculate 3% of this: £14,565 divided by 100 is £145.65 £145.65 multiplied by 3 equals £436.95 The amount of local income tax you will pay over the year will be £436.95. Personal allowance £5435 Personal allowance for people aged 65-74 £9030 Personal allowance for people aged 75 and over £9180
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