Council Tax to be replaced by a local income tax

On 11 November 2004, a Bill was introduced in the Scottish Parliament that almost certainly will involve the collection of a new type of income tax through the payroll. The new tax will apply only to employees resident in Scotland but, as many of them have employers that are based outside of Scotland, the new tax will have a much wider impact than in just Scotland.

The Council Tax Abolition and Service Tax Introduction (Scotland) Bill will replace the Council Tax in Scotland with a new Scottish Service Tax. The intention of the Bill is to change the way in which local authorities are funded by replacing the property-based Council Tax with an income-based tax. The Scottish Service Tax will exempt low-income earners altogether and collect tax using a rising scale of percentages according the different income levels. This is expected to effect a redistribution of income and, because the measure is expected to bring in more monies that the existing Council Tax, the intention is for domestic water and sewerage charges to be removed altogether.

The arguments for replacing what is seen by the Scottish Parliament as an unfair tax are set out in detail in the Bill's associated documents. They include the difficulties that local authorities have in collecting unpaid Council Tax and the problem, caused by increases in property prices, of allocating properties to the appropriate Council Tax band.

The new tax is not strictly a "local" income tax because the rates will not be set locally. Although the Bill does not specify how the tax should be collected, and it will be open to Scottish authorities to collect it locally if they wish, it is intended that the collection process will be contracted-out to the Inland Revenue. The Inland Revenue already maintains a register of Scottish employees in preparation, if it ever occurs, for the Scottish Parliament to make a change to the basic rate of income tax for Scottish residents. Also, the Inland Revenue's collection costs are considerably lower than the costs incurred currently by local authorities in collecting Council Tax.

To allow time for the Inland Revenue's and employer's payroll systems to be updated to accommodate the collection of the Scottish Service Tax through the payroll, the proposed date for its introduction is 1 April 2006. At that date, all outstanding liabilities for community charge and council tax will be cancelled.

The income bands and percentage tax rates set out in the Bill are as follows:

An employee's "relevant income" is not the same as taxable income for PAYE income tax purposes. An employee's tax code will not be relevant to the calculation. Any employee whose earnings are less than £10,000 will not pay any Service Tax at all; it is an automatic exemption. There are 635,000 individuals, including pensioners, with income of less than £10,000 in Scotland, 26% of all tax-payers.

Note also that the tax is not based on the total income of a household but on the earnings of each individual in the household.

Examples:

• An employee with a salary of £20,000 will pay £450 Scottish Service Tax, i.e. £10,000 @ 0%, plus £10,000 @ 4.5%
  
  
• An employee with a salary of £45,000 will pay £3,150 Scottish Service Tax, i.e. £10,000 @ 0%, plus £20,000 @ 4.5%, plus £15,000 @ 15%
  
  
• An employee with a salary of £100,000 will pay £13,100 Scottish Service Tax, i.e. £10,000 @ 0%, plus £20,000 @ 4.5%, plus £20,000 @ £15, plus
  
  £40,000 @ 18%, plus £10,000 @ 20%

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...back to 26 November 2004

Source:
www.scottish.parliament.uk/business/bills/pdfs/b31s2.pdf
www.scottish.parliament.uk/business/bills/pdfs/b31s2fm.pdf
www.scottish.parliament.uk/business/bills/pdfs/b31s2pm.pdf