Share |
The truths they don't want you to read....

Friday, April 13, 2007

Local Income Tax

I'm all in favour of a local Income Tax as I think that it has many advantages and the disadvantages and loopholes can (fairly) easily be closed. What seems to be A Bad Idea is a National Local Income Tax. Let me explain, with some numbers based on how it will affect the Western Isles.

But first, some background. A local Income Tax is a simple addition to your Tax Code based upon your home post code. So, for example, if you are an employee your Tax Code will be changed to recover the appropriate additional tax, and the self-employed will have a change to their tax assessment at the end of the year. The mechanisms are all in place - the taxman has your post code and employees will see "/s" on their coding notice if they live in Scotland but their employer is in England.

The following are the Council Tax bands for the Western Isles for 2007/08.
Property value Band Council Tax 2007/08
Under £27,000 A 682.67
Up to £35,000 B 796.44
Up to £45,000 C 910.22
Up to £58,000 D 1,024.00
Up to £80,000 E 1,251.56
Up to £106,000 F 1,479.11
Up to £212,000 G 1,706.67
Over £212,000 H 2,048.00

The level of the Local Income Tax is perhaps 3%, perhaps up to 7.5% depending upon who you believe, so I did the calculations up to a level of 10%, and compared it to the Council Tax Band.

Household taxable
3.0% Band 5% Band 7.5% Band 10.0% Band
£10,000 300 A 500 A 750 B 1,000 E
£15,000 450 A 750 B 1,125 E 1,500 G
£20,000 600 A 1,000 D 1,500 G 2,000 H
£25,000 750 B 1,250 E 1,875 H 2,500 H
£30,000 900 B 1,500 G 2,250 H 3,000 H
£40,000 1,200 E 2,000 H 3,000 H 4,000 H
£50,000 1,500 G 2,500 H 3,750 H 5,000 H
£60,000 1,800 G 3,000 H 4,500 H 6,000 H
£70,000 2,100 H 3,500 H 5,250 H 7,000 H

What this shows is that if your total household income is £20,000 and the Local Income Tax is 3%, then you are better off. With a LIT of 5%, then you are better off if your house is Band D or above. With a LIT of 7.5%, then you are worse off unless you live in a Band H house.

Why does this come about?

Simple, because the Council Tax in the Western Isles is so low, a nationally set LIT will result in us subsidising the areas with the highest income and highest Council Tax. This was not what was intended, and certainly not what I gave my support to, and promises to penalise the Western Isles, again.

That's all before I can tell you a very, very easy way for the rich to avoid the worst effects of LIT.

Amended 13/4/07 to change "household income" to "Household taxable income" in the interests of clarity.


Anonymous said...

That is an interesting table and thanks for the calculation.

However please correct me if I am wrong, but it is flawed.

You fail to deduct for each income bracket the personal allowance which will not be taxed, of 5260 pounds( it is that, I think).

So the tax take of a local income tax is grossly overstated in your table, especially for low and moderate income brackets.

The ideal is the enemy of the good.

THe SNP proposal is the best one going.

Angus said...

Sorry, you are correct to point out a lack of clarity in what I write. I should have made it completely clear that it is "Taxable Income, after deduction of allowances.

Most people can add £5,225 to that figure to give total income, but others may have more or less allowances depending on circumstances.

I've amended the table wording to make it clear.

Thank you.

Anonymous said...

not so sure.

to compare you have to look at taxable income distribution.

now if taaxable income is lower in Western Isles than elsewhere then the tax taken will be lower under local income tax , per household, than say in Edinburgh. As it should be in my view.

YOu are not presenting a comparison simply by presenting your table.

If average taxable household incoime in Western Isles is , say 10000, say then that is 15000 approx total inciome pa. So 300 per annum local tax.

Anonymous said...

Is it a fixed 3% tax on your taxable income, or is it 3% added to basic rate i.e. the current rate increased to 25%, and is it all taxable income or is it earned income? Though of course by the time this goes through the basic rate will be 20%.

Angus said...

As I understand it, it is 3% added to the basic rate but only on earned income. This is supposedly to protect pensioners living in the large family home. Of course, it also means that the businessman taking dividends and no salary will avoid LIT. This is the second biggest flaw in the proposal and will bring the principle of LIT into contempt.