Battle of the bands: the prospect of council tax reform in Scotland and beyond

Published on Tax and Welfare

It is 25 years since the UK government announced its plan to abolish the community charge and introduce a new local tax for Scotland, England and Wales. Since then, council tax has undergone almost no reform, and in Scotland and England is still based on property values from 1 April 1991.

But now change is afoot, at least in Scotland. Ahead of the May elections, and following on from the Commission on Local Tax Reform, the Scottish government has announced a package of limited reform. From April 2017, council tax will be increased for those in the higher bands (E-H) alongside increases in the generosity of the Council Tax Reduction scheme for lower income families.

Other parties are promising change too. The Scottish Labour and Green parties have proposed alternatives, with both supporting revaluations and taxes proportional to home values, and the Liberal Democrats and Conservatives are also expected to put forward plans for reform. In Wales too there are calls for further reform, with Plaid Cymru proposing a redistribution of council tax burdens.

This briefing note explores the current Scottish system as well as these recent proposals, and looks at the potential impacts of change on families with different levels of property wealth and of different incomes.

  • The current council tax system represents a much higher rate of tax relative to property values for those in lower value homes. The highest value properties may be taxed at a rate of less than 0.1 per cent per year while the lowest value ones attract tax rates of over 1.5 per cent. All of the reforms considered in this note would improve the proportionality of the system.
  • Because those in higher band properties tend to have higher disposable incomes – with around three quarters of the poorer half of the population living in Band A-C homes – the reforms are also likely to be progressive to varying degrees.
  • The SNP plan is set to raise £100 million, with half of this net revenue increase coming from the richest fifth of households by income. The proposed tax increase exemption and extra child boost, both delivered via the Council Tax Reduction system, have a substantial positive effect. Indeed, some households with children will be better off as a result of the package of changes, though boosting take-up of Council Tax Reduction remains a key challenge.
  • Both the Labour and Green proposals would impose larger tax increases on those in the most expensive properties than the SNP plans. Unlike the SNP, Labour’s approach is designed to be cost neutral and the majority of households would receive small tax cuts. The Green Party’s plan would raise more revenue while also producing more losers. Both would undertake a welcome revaluation of property values, with estimates suggesting that the continued use of valuations from 1991 has left the majority of households in the wrong council tax band.
  • Increases in council tax might also be expected to lead to reductions in property prices (with the reverse true of decreases).
  • Given Wales’s extra council tax band and Northern Ireland’s rates system, reform in Scotland would leave England with the UK’s most regressive structure of local property taxation.