Council tax reform

6th March 2016

An additional £100 million a year will be invested in schools across Scotland as a result of a package of reforms to council tax outlined today by the First Minister.

To make the system fairer from April 2017, the rates paid by those in the four highest council tax bands (E, F, G and H) will be adjusted in a move that will generate £100 million a year. The additional revenue will be invested in schools through future local government settlements.

Under the proposals, which build on the recommendations of the Commission on Local Tax Reform, the average band E household will pay around £2 per week more and the average household in the highest band will pay around £10 a week more.

The 75 per cent of Scottish households that live in bands A to D will be unaffected by this change to the council tax band system and a further 54,000 households living in bands E to H on low incomes - more than one third of which are pensioner households - will be entitled to an exemption from the changes through the council tax reduction scheme.

The reforms will also provide additional support to families on low incomes across all council tax bands by extending the relief available to households with children. This will benefit 77,000 low income families by an average of £173 per year, supporting an estimated 140,000 children.

Council tax bills have been frozen in Scotland since 2007 and the changes announced today will ensure that bills in every band will be lower than they would have been had the freeze not been in place. Across Scotland, average rates in all bands will remain lower than the average in England.

The council freeze will continue until April 2017. From April 2017, the freeze will be replaced with discretion for local authorities to increase council tax by a maximum of 3 per cent per year. This could generate up to £70 million for council services across the country.

The First Minister also confirmed that the changes announced today will pave the way for longer term reforms that will give local councils the benefit of growth in the Scottish economy, make taxation to fund local government expenditure as a whole more progressive and make the funding of local services more transparent.

The First Minister said:"Over the past eight years, our council tax freeze has helped households across the country, keeping bills affordable during difficult economic times while ensuring that councils receive the funding required to provide the services people need. The council tax freeze will remain in place for 2016/17 - a ninth consecutive year.

"However, the Commission on Local Tax Reform made clear that the present system could be made fairer. We are choosing to do this in a reasonable and balanced way that will also generate £100 million of additional revenue to invest in schools.

"These reforms to council tax bands will mean no change for three out of every four Scottish households, with those in lower banded properties paying no more than they do now.

“Households will also still, on average, pay less than those on equivalent bands in England and less than they would be paying had the council tax freeze not been in place.

“To support those on low incomes and provide additional support to families we will also increase the child allowance within the council tax reduction scheme by 25 per cent - this will benefit 77,000 households by an average of £173 per year - around £15 per month. This boost for low income families will help nearly 140,000 children across Scotland.

“We will also extend the council tax reduction scheme to exempt 54,000 households on low net incomes, but who live in higher property bands, from the change to the system."

Setting out further proposals for reform over the course of the next parliament, the First Minister added:“In responding to the Commission, we have also heard demands for local authorities to be more responsible for their own finances and be less dependent on grants from central government, but without adding to the burden on households.

“As part of our proposals, from April 2017, we will replace the council tax freeze with discretion for councils to increase tax - if they so choose - by a maximum of 3 per cent a year. This will see councils be more accountable for raising revenue, while ensuring that the rapid and significant rises we saw in the past do not return.

“Importantly, to ensure the contribution individuals make to the delivery of local services is more closely tied to their earnings, as well as to incentivise councils to support economic growth, we will formally consult local government on the assignment of a portion of the devolved income tax raised in Scotland to councils, reducing their reliance on grant funding from central government.

“Overall, these proposals will protect household incomes, support investment in our schools, make local taxation fairer and ensure local authorities continue to be properly funded while becoming more accountable."

Overview of the local tax reform package:

The council tax band multipliers for properties in bands E, F, G and H - relative to band D properties - will be increased from April 2017, as follows: for band E, the multiplier will increase from 1.22 to 1.31; for band F from 1.44 to 1.63; for band G from 1.67 to 1.96; and for band H from 2.00 to 2.45. These changes will raise additional net revenue of £100 million per annum.
The annual average increases in council tax as a result of these band adjustments will be £105 for band E, £207 for band F, £335 for band G and £517 for band H.
There will be a targeted relief for around 54,000 households in properties in bands E to H on net incomes below the Scottish median for their household type, up to £25,000. These households will be entitled to claim an exemption from the increases from changes to the banding system through the council tax reduction scheme.
The council tax reduction scheme will be further amended to extend the relief available for low income households with children. An increase in the child allowance of 25 per cent will benefit 77,000 households - containing almost 140,000 children - by an average of £173 per year.
The council tax freeze will stay in place for financial year 2016/17 - which means that the council tax will have been frozen for nine consecutive years. From 2017, the freeze will be replaced by discretion for local authorities to increase tax - if they so choose - by up to a maximum of 3 per cent per year. This would enable local authorities to raise additional revenue of up to £70 million per year.
In addition to this extra revenue, local authorities will also retain the £70 million per year that has funded the council tax freeze.
Local government will be formally consulted on exchanging a fixed proportion of general revenue grant for the assignment of a fixed proportion of income tax receipts, distributed to individual councils by existing needs based formula. This would;
Allow local government to benefit directly from economic growth and incentivise councils to contribute to this growth. The OBR projects that income tax receipts will grow by 6 per cent per year over the next 5 years.
Increase local authority budgets by £150-200 million a year by 2020/21 if 25 per cent of income tax receipts were assigned to councils.
Result in only 25 per cent of local government spend being funded by general revenue grant - the remaining 75 per cent would come directly from taxes, user charges and other income, making local authorities more financially accountable.
Ensure that the taxes that fund local services will, overall, be progressive.
Legislation will be introduced to allow councils to end the council tax discounts that presently apply to second homes from April 2017 to support local housing markets.
There will be consultation on enabling councils to levy a tax on development, and vacant and derelict, land to reduce land banking and increase supply of homes.
Address the known low uptake amongst pension age households who may be entitled to relief under the council tax reduction scheme.