UK Tax Essentials

Council Tax – Funding Local Government

How council tax is used to fund local government in the UK

A Guide To Direct And Indirect Taxation In The UK – How To Save Money
Chapter Ten

Story Highlights:

This chapter concentrates on council taxes with detailed explanations about:

  • The history of council taxes
  • How council taxes are evaluated and how to query your council tax
  • Why we pay council tax in the UK
  • Who’s responsible for paying council tax and when
  • Property exemptions and reductions for council tax
  • Exemptions and reductions in council tax for occupants
  • Council tax reductions for the disabled and disregarded people
  • Council tax reduction schemes for low-earners
  • Arrears with council tax
  • What the bedroom tax is

History of council taxes

Whether you’re a tenant or a home-owner, most people in the UK are liable for paying some kind of council tax. This chapter begins with a brief history of council tax before explaining how the present system of council tax works: how it’s evaluated, why we pay it, who’s responsible for paying it and when.



In the second part of this chapter, we consider reductions and exemptions for council tax. If you’re finding it hard to get by because of your personal circumstances, do you know what kind of help you could be entitled to from your local authority? Finally, we conclude the chapter with an explanation of the bedroom tax – what is it and is it really a tax?

Early council rates

A form of council taxes – or property taxes – have existed since the early 17th century when parishes imposed a poor rate levy to fund the Poor Law of 1601. As local government developed, separate rates were collected by parish authorities, borough corporations and county authorities. The County Rates Act of 1739 put an end to the practice of separate rates for different purposes.

A form of council taxes have existed  since the early 17th century

The Rating and Valuation Act of 1925 calculated council rates according to the nominal rental rate of the property. In successive years, properties were supposed to be reassessed periodically although these re-evaluations were frequently delayed or suspended.

The community charge

During 1989-1990, council rates were replaced by the community charge (also known as the poll tax), which was a ‘head tax’ – meaning that every adult had to pay a fixed rate set by the local authority.

To say that the poll tax was unpopular would be a massive understatement. It was felt that the administration of the tax put an unfairly heavy burden on the poor while it also encouraged many people to avoid registering for the vote in order to avoid the charge. This community charge was the major reason for the political downfall of Margaret Thatcher. When she stepped down from power, there was only 2% support for the poll tax in the opinion polls.

Council tax since 1992

Council taxes were introduced in England, Scotland and Wales by the Local Government Finance Act of 1992 and replaced the unpopular poll tax. Although they are similar to the previous system of council rates, they are calculated according to the sales value of the domestic property rather than its rental value. Legislation has made it clear that council taxes are made up of a 50% property tax and a 50% personal tax.

How were council taxes evaluated?

Each domestic property was assigned to one of 8 bands in April 1991 by the VOA (Valuation Office Agency) according to its sales price and council taxes for each band are a fixed amount. Band A begins with houses evaluated to be worth up to £40,000 (at 1991 prices) and continues with gradual increases through all the bands up to Band H, which is for houses worth £320,000 or more. The ratio between rates for different bands are set by central government and rates are calculated as a proportion of the Band D rate. Most properties are below Band D so most occupants pay less than the Band D rate.

A row of English houses that are below the Band D council tax rate

Since the beginning of the century, there have been pledges to re-evaluate all properties but this hasn’t yet been carried out except in Wales where the A-H Bands have been replaced by (more recent) numbered Bands of 1 to 9 (with 1 being the highest). Bearing in mind the outcry among the business community about the re-evaluation of business rates in April 2017 (after it had been delayed by only 2 years), just imagine the equivalent when council taxes are re-evaluated after more than 25 years. This is long overdue and will become a political liability for whichever party is in power at the time.

How to query your council tax

Because of the time which has passed since properties were evaluated for council tax, you might feel that your property hasn’t kept its value. In this case, you could ask for it to be placed in a lower Band (which will effectively reduce your council tax). Contact the VOA on: 0300 0501 501 if you feel your council tax Band is wrong and explain why.

Why do we pay council taxes?

Council taxes are a locally-run tax system, which allow local authorities to raise money for services such as waste collection, street lighting and cleaning. In 2014-15 the money raised from these taxes was enough to cover 24.3% of all council expenditure. The rest of the funding for local government comes from central government and business rates. These business rates are collected locally, half is kept by the local authorities with the rest going to central government from where it is then redistributed according to population and the relative needs of local authorities.

Council tax allows local authorities to raise money for services such as waste collection, street lighting and cleaning.

Unfortunately, cuts in funding from central government have left councils with shortfalls in their budget while caps on tax increases of more than 2% haven’t given councils the freedom to raise taxes as much as they would like. Unlike income tax, which is the same wherever you live in the UK, council tax can vary a great deal according to which area of the country you live.

Summary:

Council rates originally started as a parish levy for poor relief and were based on the rental value of the domestic property.

The community charge (or poll tax) was a ‘head tax’ and was so unpopular that it was replaced by council taxes in 1993.

Council taxes were evaluated using an 8-band scale according to the sales value of a domestic property.

Council taxes pay for locally-run government services such as street lighting and can vary according to the area where you live.

Who’s responsible for paying council tax and when?

Although the bill for council tax may only have one person’s name on it, partners who are co-habiting are equally responsible for the payment of the council tax. The ‘liable person’ must be over 18 to pay this tax and is usually the owner of the property. If the property is being rented, then the tenants would usually be responsible for paying it. The only exception is if the property is under multiple occupancy, in which case the landlord would pay the council tax (but would probably increase the monthly rent to cover their extra tax expenses).

Partners who are co-habiting are both responsible for paying council tax

Demands for council tax are sent out in April and it is paid in 10 instalments although you can pay in 12 (monthly) instalments if you prefer. Some councils may accept weekly or fortnightly payments if that is the way your income is paid while some might also offer a discount for the tax being paid in a single lump sum. Apart from receiving a discount for paying all your council tax upfront, what other reductions are available and who is eligible?

Property exemptions and reductions for council tax

Some property is exempt from paying council tax while some types of property would have a reduction. If the property is being renovated or is in other way uninhabitable, then council tax doesn’t have to be paid. Certain kinds of residence such as Halls of Residence (for students) or army barracks are also exempt from paying council tax.

Depending on your local authority, second or holiday homes would usually have a 50% reduction on their council tax since the property isn’t inhabited as a main residence. Empty property would also mean that the owner would only have to pay half the usual council tax. However, in an effort to relieve the housing crisis, some councils have begun to penalise owners who leave a property empty for longer than 2 years by charging them a council tax rate of 150% or even 200% so they will be encouraged to rent it out. The only exception to this occupancy rule is if it concerns an annex or if the owner is in the Armed Forces.

Questions:

How much is the council tax in the UK?

This depends on the area but the average annual council tax for Band D in 2016-17 was £1,530 although the average for all households was £1,128 (since the majority of properties are below Band D).

How many people pay their council tax?

Because it’s a tax related to your residence, it’s very difficult to evade and so in 2014-15 there was a 97% collection rate for council tax.

What criticism has there been of the council tax?

Because property of higher value is lumped together in Band H (all property worth £320,000 or over), council tax has been criticised as being disproportionately more heavily weighted towards the less affluent.

What cuts have there been in central government funding for local government?

During 2016-20 there are planned cuts of 6.7% in central government funding for local authorities.

How many properties have been placed in the wrong Band for council tax?

Because of the way properties were evaluated at the time, it’s estimated that 400,000 homes in England and Scotland were placed in the wrong Band.

Exemptions and reductions in council tax for occupants

Certain occupants are exempt from paying council tax in certain circumstances and these include occupants who have had their house repossessed by their mortgage provider and occupants who have had to go into a care home. If you find a change in your circumstances, then you should contact your local authority as you might be entitled to an exemption or reduction in your council tax.

A senior man, who is a single occupant of his property, is reading in his living room

Single occupants of a property only pay 75% of the standard council tax because they’re entitled to a 50% reduction in the personal component part of the tax. Apart from single occupants, most councils have set ways to reduce the tax according to occupants’ income, age, employment status, health and whether they’re full-time students. Let’s look at some of the groups of people who are eligible for reductions in their council tax.

Summary:

The occupant of the property (whether the owner or a tenant) is responsible for paying the council tax unless the property has multiple occupancy.

Demands for council tax are sent in April and it’s usually paid in 10 instalments with possible discounts for paying the full amount upfront.

Some properties are exempt from paying council tax or can have reductions.

Occupants may be also be exempt from paying council tax or have reductions according to their personal circumstances.

Council tax reductions for the disabled and ‘disregarded people’

You’re entitled to reductions in council tax if a member of your household is registered as disabled. You show that a disabled person lives in the property if it has an extra bathroom/any other room to meet their needs or it has enough indoor space to use a wheelchair. To receive the discount in council tax, you should apply in writing to your local authority and request the special application form. You may have to supply other proof such as evidence from a doctor.

The other category of people who can have reductions in council tax are ‘disregarded people’. This category includes people aged 17 or under, care workers, young people who are full-time students or who are serving an apprenticeship and none of them have to pay the full rate for council tax.

Council Tax reduction schemes for low-earners

Also known as Council Tax Support, Council Tax Reduction schemes allow people on low incomes to have a discount or exemption from paying council tax. Since April 2013, these schemes have been run locally in England so the amount of financial support you’re eligible for can depend on where you live.

Council Tax Reduction schemes allow people on low incomes to have a discount or exemption from paying council tax.

You should visit this website for details of 300 such schemes run by local authorities or contact your local council. By law, they should have details of the rules about how to apply, how applications are decided, when you need to notify them of any change in your circumstances, arrangements for backdating any claim for exemption or reduction and any extended reductions in certain circumstances.

Some councils provide a default Council Tax Reduction scheme, which allows those on a low wage to receive exemption from council tax if their income is less than the amount the government believes they need to get by (or the applicable amount) – irrespective of whether they’re a pensioner or worker. If you’re turned down for help with your council tax bill, you can ask the council to review their decision. If they don’t reply in 2 months or refuse to change their original ruling, then you have 2 months to appeal their decision with the Valuation Tribunal.

Arrears with council tax

If you’re late paying your council tax, you’ll receive a reminder to pay within 7 days. You will then become liable for the full amount of council tax owed on your property rather than just the missed instalment. If the tax bill remains unpaid, your local authority have the right to apply for a liability order from magistrates’ court. They can then be given the power to deduct the amount from your salary or from your state benefits or send bailiffs to seize goods which are of equivalent value to the unpaid tax. In exceptional cases, the person liable for the council tax can be sent to prison for up to 3 months.

A woman is reading her notice to pay her council tax bill within 7 days

Like any other debt, you shouldn’t just ignore the bill but contact your local authority to explain the reasons why you’ve been unable to pay the council tax. If you have spoken to them, they’re much less likely to pursue the matter legally. If you’re suffering exceptional hardship because of a chronic illness or a redundancy, you might be entitled to discretionary help. The Valuation Tribunal has the power to either reduce or cancel your bill for outstanding council tax.

Summary:

Reductions are available for council tax if a member of your household is disabled or for certain ‘disregarded people’ such as full-time students or minors.

All local authorities run a council tax reduction scheme (or council tax support) for those on a low income.

Such financial support schemes vary according to the local authority and you can appeal if your application is turned down.

If you’re late paying an instalment of your council tax, you could become liable for the full amount and the local authority could apply for a liability order.

What is the bedroom tax?

Strictly speaking the bedroom tax isn’t a tax at all but is actually the removal of a subsidy. The Welfare Act of 2012 included the removal of the spare room subsidy (or RSRS) for social housing so that tenants who had more bedrooms than they needed would be penalised by a reduction in their Housing Benefit – a 14% reduction for one extra bedroom and a 25% reduction for 2 or more. This is something which already exists for tenants who rent in the private sector.

Bedroom tax aimed to ensure equal  treatment of private and public tenants

The reasoning behind the bedroom tax was to ensure equal treatment of private and public tenants, encourage those with too much room to ‘downsize’ and thereby free these homes for larger families and of course reduce the amount paid out for Housing Benefit. In fact before its introduction, the DWP predicted savings of £1,045 billion.

However, it hasn’t had the consequences which the law-makers intended. Not only have tenants found it impossible to move because of the lack of available smaller-sized social housing stock but those who moved tended to transfer into the private sector where rents are much higher and therefore their Housing Benefit has also increased.



Questions:

How much revenue is generated by council tax?

According to the IFS, council tax was due to generate £30.1 billion in 2016-17, which represents 4.2% of total government receipts.

Are pensioners entitled to reductions in council tax?

Pensioners who receive the Guarantee Credit part of Pension Credit are probably entitled to exemption from all of their council tax. Other pensioners with a low income and less than £16,000 in savings are entitled to a partial reduction.

How many tenants are affected by the bedroom tax?

It’s estimated that 3.9 million tenants in social housing are affected by the bedroom tax.

Has the bedroom tax led to savings in Housing Benefit?

Many of the predicted savings in Housing Benefit have been cancelled out by tenants going into the private sector and paying more rent. Also, the DWP has had to give more money (about £14.8 million) to local authorities to deal with the extra administration caused by the bedroom tax – not only to organise applications for transfers but also to chase up rent arrears. A further £500 million has been given for Discretionary Housing Benefit whilst local authorities have been promised another £870 million up to 2020 to cover the extra expenditure.


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About the author

Thomas Henderson

Thomas worked as a consultant in personal finance in the UK for 18 years. He has found a passion in sharing his experience on familymoney.co.uk

Thomas also takes pleasure in woodworking, reading and observing stock market trends.

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About The Author

Thomas Henderson

Thomas worked as a consultant in personal finance in the UK for 18 years. He has found a passion in sharing his experience on familymoney.co.uk

Thomas also takes pleasure in woodworking, reading and observing stock market trends.

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