Scrap Council Tax

FAQs about Local Income Tax

Q1. Why do we need a local income tax?

Because council tax is so unfair. Liberal Democrats want to replace it with a tax related to ability to pay. Local income tax is not about more taxes or higher taxes: it's about fairer taxes.

Q2. How would local income tax work?

Much like national income tax. Councils would set their rate for local income tax and this would be added to the national rates of income tax. The Inland Revenue would administer and collect LIT, with national income tax, passing the money to councils depending on their rate.

Q3. How much would I pay under local income tax?

Like council tax, this will depend in which local authority you live. We estimate the national LIT average, to replace council tax, will be around 3.5p. However, you would only pay LIT on your taxable income. Thus, an individual in 2003/04 gets an income tax-free allowance of £4,615: no LIT would be paid on that. Someone earning £14,615 only pays LIT on £10,000 - £350 at the average rate of 3.5p.

Q4. I don't have to pay income tax at present. Will I now have to pay Local Income Tax?

No. If you don't earn any income above your tax allowance you won't pay Local Income Tax either - it uses the same tax system. Over 50% of pensioners don't pay income tax now. They would pay no LIT.

Q5. I'm a higher rate taxpayer. Do I now have to pay LIT at a higher rate too?

No. Councils can set only one rate, so you will pay the same LIT rate on all your taxable income.

Q6. I own a holiday home in Devon as well as my home in London. Will I pay LIT twice?

No. However, in order to ensure owners of second homes pay a fair contribution to local services, we would levy our equivalent of business rates, local site value rates, on the second home.

Q7. Would I have to pay LIT for the District as well as the County Council?

As with the Council Tax, there would be LIT precepting by each tier. The Inland Revenue would then distribute the right amount to each of your local Councils. The same goes for Parishes, fire and police.

Q8. How would the Inland Revenue combine a LIT system with national income tax?

There are 2 ways to combine LIT administration with national income tax:

(i) One option is for an average rate of LIT to be calculated from the different LIT rates of councils. This would be added to the national rates and deducted through the year. An end-of-year process would ensure a taxpayer pays the correct amount of national and LIT. If your local authority has set a rate of LIT lower than the national average, then you will get a rebate. If your authority has set a rate higher than the average, then you pay a little extra.

(ii) Alternatively, the existing PAYE codes could be adjusted to reflect the LIT rate to be paid by each employee. Before widespread computerisation, it was thought to be too cumbersome for employers, but the development of tax credits shows this could now work.

Liberal Democrats would consult to see which option taxpayers, employers and financial institutions preferred. Both options save hundreds of millions in administration - as LIT "piggybacks" on PAYE.

Q9. Would the Council get to know my personal financial affairs?

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

Q10. Would LIT be expensive to collect?

No, it would be cheaper than council tax. This is because it "piggy backs" on an existing system and does not need a benefit system. Council tax and council tax benefit cost £570mn just to administer. We expect to save upwards of £300 million. Other countries' LIT admin costs are low.

Q11. What about the self-employed and students?

Little change. The self-employed would have to say where their primary residence was, on their existing tax forms. Students would only pay LIT if they are already paying income tax, e.g., on holiday earnings.

Q12. Will people sharing houses have to pay separately?

Yes, but they will only pay LIT on their taxable income.

Q13. How quickly could LIT be introduced?

Within two years maximum. As it uses an existing system, the only major delays would be consultation on details and getting legislation through Parliament.

Q14. Won't more deprived areas end up with higher local income tax rates than richer areas?

Not necessarily. Just like now, the grant all councils get from central government takes account of a local authority's tax base. So poorer areas will still receive more support than richer ones, like now.

Q15. Would LIT be unacceptably expensive?

No - and because of administrative savings, the overall tax bill is likely to be lower. Our political opponents may quote random figures of what it will cost local people, but they should justify those figures. The truth is, most people's LIT bills will be lower than their council tax bills, as the most well-off in any area will be asked to pay a little more.

Q16. Would LIT be difficult to enforce? Wouldn't people evade it?

No, national income tax is not avoided by the vast majority. That's one reason why national income tax revenues are "buoyant", growing faster than receipts from other taxes. Our opponents claim well-off people with clever accountants and those in the black economy won't pay, but the evidence is against them. Some councils still fail to collect a great deal of their council tax.

Q17. I live in one council area and work in another: which council would charge me LIT?

LIT would be charged for the local authority area in which you live.

Q18. Would LIT hide the cost of local government?

No. The reverse. With one option (seeQ8), the year-end adjustments involve refunds when a council's LIT is below the average, and extra bills when they are above. These refunds and extra bills show taxpayers how their council compares to others, and would arrive just before the May local elections. Thus, visibility of costs would increase. If consultation showed people preferred our other option - for PAYE coding changes -we would ensure the Inland Revenue sent a year-end account to each taxpayer to show the cost, along with our national "Taxpayers' Contract" showing how national government spends national taxation. Pay slips could show LIT too.