Arguments in Favour of a Local Income Tax

The following are arguments supporting a local income tax as an alternative to the council tax:

It's fair:

Whoever a person is, if they have more income, they should make a larger contribution. That is the simple principle of progressive taxation - the foundation for fair tax in the western world. Poorer pensioners will pay nothing, whereas those with larger private incomes will make a fair contribution.

It's easy and cheap to collect:

A local income tax would “piggy back” on the national system. Existing Inland Revenue records would be used to collect the tax, and only small changes are needed to adapt the current system. There would be savings in reduced bureaucracy of several hundred million pounds a year. Unlike Council Tax, it needs no costly separate rebate system.
 

If it’s so fair and efficient, why has no-one else thought of it?

They have. A Royal Commission in 1976 - the Layfield Commission on Local Government Finance - recommended a local income tax as the only way for local authorities to collect more of their own funds for public services.  It said: “A local income tax on all personal incomes, the rate being set by the local authorities, is the only feasible major new source of income meriting consideration."

Many other countries as diverse as America and Sweden use a local income tax system.

How Local Income Tax works:

1. Your local authority would set a level of LIT after working out its budget for the coming year and taking into account money from central government grants. (This is like council tax setting).

2. The Inland Revenue would calculate the average rate of LIT, and collect that from everyone through the year – but you would only pay LIT on your taxable income, i.e. income above the tax free personal allowance.

3. An end-of-year process would ensure that a taxpayer pays the correct amount of national and local income tax. For the 9 million people on self-assessment, this means one extra line on their form. For PAYE taxpayers, the Inland Revenue will prepare returns from employer and financial institution data and ask each taxpayer to verify the information. An added bonus is this process would help take-up of tax credits like pension credits.

4. If your local authority has set a rate of LIT lower than the national average, then you would get a rebate. If your authority has set a rate higher than the average, then you would pay a little extra. This would improve accountability and give an incentive for councils to set lower tax rates to avoid being above the average.

Your Local Income Tax questions answered:

Q. I don’t have to pay income tax at present. Would I now have to pay Local Income Tax?

No. If you don’t earn any income above your tax allowance you would not pay Local Income Tax either – it would use the same tax system.

Q. I’m a higher rate taxpayer. Would I now have to pay LIT at a higher rate too?

No. There would only be one percentage rate for each local authority area.

Q. Would the Council get to know my personal financial affairs?

No. Only the Inland Revenue would need to know. The LIT system allows greater privacy as people do not have to apply for the means tested Council Tax benefit.

Q. How much would I have to pay?

Like council tax, this will depend in which local authority area you live. It is estimated that the national LIT average, to replace council tax, would be around 3.75p, though this does not take account of administrative savings.