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Published on 9 February 2024

Council tax – where do we go from here?

Various attempts are being made by the governments in Scotland and Wales to make council tax ‘fairer’. We take a look at some of the reasons for the perceived unfairness of council tax, and some of the suggestions as to how to resolve this.

a house and the words 'council tax' carved from wood against a navy blue background
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Council tax background

Council tax applies in England, Scotland and Wales (Northern Ireland operates a rates system instead). There are subtle differences between the tax in the three nations, as powers over council tax are devolved to the Scottish and Welsh Parliaments.

Council tax is a local tax, so it is administered by local councils (local authorities). It applies to domestic properties. The owner or occupier of the property pays the tax. Each domestic property has a value, and it is this that determines which valuation band the property falls within and the tax charge.

There are discounts and exemptions available to reduce the council tax charge in some circumstances. The owner or occupier must apply to their local council to benefit from one or more of these discounts and exemptions.

So what are the problems?

Council tax is perceived by some people as unfair. A few of the reasons for this include:

Outdated property valuations

England and Scotland both use property values as assessed at 1 April 1991; Wales uses values as assessed at 1 April 2003. Some circumstances can mean a change to the valuation of your property, but by and large, the banding of properties is still dictated by a valuation that is now over 30 years out of date (20 years out of date in Wales).

This results in some oddities. Different properties have increased in value at different rates since 1991 (or 2003 in Wales), meaning that if all properties were revalued, many properties would be in different bands. In fact, analysis carried out by the Commission on Local Tax Reform, which looked into the reform of council tax in Scotland in 2015, suggested that over half of all properties in Scotland would have changed band if there had been a revaluation in 2014. There are many domestic properties that were built after 1 April 1991 (or 1 April 2003 in Wales) – these have all been placed in a valuation band based on a hypothetical value.

Inevitably, some properties that are now of similar value have very different council tax liabilities from each other. Likewise, there are undoubtedly households in lower value properties paying more council tax than households in higher value properties.

Banding system

There are eight council tax bands (nine in Wales). The same basic tax charge (before taking into account any discounts) applies to all properties that fall within the same valuation band. In England, council tax band D applies to properties that have a 1 April 1991 value of between £68,001 and £88,000. So, a property with a value of £87,000 generates the same tax charge as a property with a value of £70,000. So, within a valuation band, the effective tax rate actually decreases as property values increase.

Low uptake of discounts and exemptions

There is a problem with uptake of discounts and exemptions – this is likely caused by the wide range, which can make it confusing and difficult to work out which to apply for. In addition, there is sometimes little publicity about discounts and exemptions, so people need to seek out the information on their local council’s website. They also need to apply – some of the forms can be long, complex and request additional information, which can put some people off applying. Moreover, if they move house to a different local council area, they will have to repeat the process, which may be off-putting, especially as the discounts and exemptions may differ.

One of the key reliefs is council tax reduction; again, analysis carried out in Scotland suggests that only between 60% and 70% of those entitled to council tax reduction actually claim and receive it.

Perceptions of what council tax pays for

Council tax contributes to the funding of local councils. However, it is not their only source of revenue. In fact, council tax only provides approximately 15% of a local council’s funding each year. The rest of their funds come from business (non-domestic) rates and government grants (which are in turn funded by national taxes like income tax). Each local council uses the funding they receive to pay for local services.

It is not unusual to hear a complaint about poor local services when council tax increases are mooted, or indeed to hear people protest that they don’t use certain local services. This is because there is sometimes a misconception that council tax is a service charge.

Regressive tax rates

When council tax is described as being regressive, it means that the effective rate of tax for higher valuation bands is lower than the effective rate of tax for lower valuation bands. Often, the fairness of a tax is equated with whether it is progressive; income tax is broadly progressive, because in general the rate of tax increases as taxable income increases.

Based on property value not household income

Council tax is charged according to a valuation of a property. This can raise concerns about the ability of some households to pay, for example where someone on a low income lives in a property that has a high value. The intention is for the tax to take account of property value, not the level of income of those people living in the property, or the number of working adults living in a property.

Calls for reform or a replacement tax

It is important to note that what is fair is subjective – how to define fairness differs from person to person. As an organisation, we think that in order for a tax to be fair, it must tax the base that it is meant to tax, and the tax base must be accurately assessed or valued. At present, the intention of council tax is to tax the value of domestic property. To some extent it fulfils that intention, but the fact that valuations are significantly out of date, or hypothetical, means that the intended tax base is not accurately assessed. Another view might be that council tax is not fit for purpose, because so many households are eligible for discounts and exemptions. Analysis carried out for the Welsh Government suggests that nearly half of households in Wales currently receive some sort of discount or reduction.

People sometimes raise a concern that council tax does not take into account someone's ability to pay. However, arguably, the value of a property, a form of wealth, is simply another form of financial means. Possibilities for tackling this, such as replacing council tax with a local income tax, have been suggested. However, it should be noted that there are other taxes, such as income tax and National Insurance contributions that are based on the level of a person’s income. There is a consideration as to whether it is fairer to keep assessing the same tax base (income) with different taxes, or whether it is fairer to assess a different tax base, such as wealth (property).

More awareness of the fact that council tax forms a relatively small part of a council’s budget might help dispel some of the complaints in relation to what council tax pays for. Some people might prefer a system by which you only pay for services that you use. Many local council services are available to all (although some councils raise additional charges for particular services, for example, in relation to waste removal); charging at the point of use might mean that some services become inaccessible to the people that need them, because of high charges. Tax systems often work on the basis that tax provides funding for the common good and society. This means an acceptance that, even though we might not use a specific local service ourselves, it benefits us indirectly that that service exists for those who do use it, by making our local neighbourhood a better place to live.

Rather than replacing council tax, it would also be possible to make significant changes to council tax, which might address some of the issues highlighted. For example, a full revaluation of all domestic property, such that all properties can be allocated to the correct band (this is currently being proposed in Wales) would be a way of addressing out-of-date evaluations. This could not be a one-off though; there would need to be regular revaluations, say every three or five years, so that there is never such an issue with out-of-date valuations again.

Perhaps one of the most important, practical changes that could be made is to improve the take-up of discounts and exemptions. This could be done by encouraging and assisting people to find out if they are eligible and helping them to apply.

Conclusion

Although there are some steps being taken in Wales and discussions ongoing in Scotland, there are as yet no firm plans for major reforms to council tax. Any changes would inevitably create winners and losers, so there needs to be wide consultation, and clear explanations as to what changes mean for people. We will engage with governments on any future changes, and, as council tax affects many low-income taxpayers, we are always interested in hearing about people’s experiences to inform our comments.

Joanne Walker
Technical officer

We would love to hear what you think about this subject. 

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