Q1. How would local income tax work?
Much like national income tax. People will pay local income tax through the Inland Revenue, which will administer and collect LIT, with national income tax, passing the money to councils depending on their rate.
Q2. Sir Michael Lyons says, "Because authorities with high council tax bases also tend to be those with high income tax bases, if a LIT were introduced in a way that shifted the balance of funding towards local revenues, one might expect the differences between local authorities’ tax bases to be amplified.”- How do you deal with the different abilities of rich and poor areas to raise income tax?
This is true-those with higher incomes tend to be concentrated in specific areas but we maintain an "equalisation" grant. Part of the grant councils get from central government reflects a local authority's tax base - its resource base. So poorer areas receive more support than richer ones, now. We would have a similar system to protect deprived areas.
Q3. I don't have to pay income tax at present. Will I now have to pay local income tax?
No. If you don't earn any income above your tax allowance you won't pay LIT either - it uses the same tax system. 56% of pensioners don't pay income tax now. They would pay no LIT.
Q4. I'm a higher rate taxpayer. Do I now have to pay LIT at a higher rate too?
No. Councils can set only one rate, so you will pay the same LIT rate on all your taxable income.
Q5. I own a holiday home in Devon and my home in London. Will I pay LIT twice?
No. However, to ensure owners of second homes pay a fair contribution to local services, we would levy our equivalent of business rates, local site value rates, on the second home.
Q6. How would the Inland Revenue combine a LIT system with national income tax?
There are several ways to combine LIT administration with national income tax:
i. One option is for an average rate of LIT to be calculated from the different LIT rates of councils. This would be added to the national rates and deducted through the year. An end-of-year process would ensure a taxpayer pays the correct amount of national and LIT. If your local authority has set a rate of LIT lower than the national average, then you will get a rebate at the end of the year. If your authority has set a rate higher than the average, then you pay a little extra.
ii. Alternatively, the existing PAYE codes, or the PAYE tax allowances, could be adjusted to reflect the LIT rate to be paid by each employee. Before widespread computerisation, it was thought to be too cumbersome for employers, but tax credits suggest this could now work. CIPFA concluded that changing tax allowances would mean there was no extra work for businesses and employers.
We would consult to see which option taxpayers, employers and financial institutions preferred. The change would save over £300m in administration- as LIT "piggybacks" on the existing income tax system.
Q7. Would the Council get to know my personal financial affairs?
No. Only the Inland Revenue would need to know your income. The LIT system allows greater privacy as people do not have to apply for the means tested Council Tax benefit.
Q8. What about the self-employed?
Little change. The self-employed would have to say where their primary residence was, on their existing forms.
Q9. What about students?
Students only pay LIT if they already pay income tax, e.g., on holiday income. Student nurses receive bursaries, but these are not taxable, so they would not pay local income tax.
Q10. Would LIT be difficult to enforce? Wouldn't people evade it?
No, national income tax is not avoided by the vast majority. That's one reason why national income tax revenues are "buoyant", growing faster than receipts from other taxes. Some councils still fail to collect a great deal of their council tax - Hackney only collects around 80%.
Q11. I live in one council area and work in another: which council would charge me LIT?
LIT would be charged for the local authority area in which you live.
Q12. Would LIT hide the cost of local government?
No, as it would be much easier to compare tax charges between local authorities. More people would pay local income tax than pay council tax, so the burden would be shared between more people and more people would have a stake in making sure the council kept taxes low. We would reform local election systems so that councils were more accountable for their decisions.
Q13. How could LIT be applied on investment income?
Local income tax will be paid on investment income and will be collected at source and will be charged at the average rate. The revenue will then be redistributed to local authorities under the spending formula used by the government to support local council expenditure. This will allow for easier and simpler collection and will not require a large bureaucracy.
Q14. Would income taxes be able to withstand the pressures better than property taxes? Sir Michael Lyons says, “It would therefore be wrong to assume that income taxes could withstand pressures that property taxes cannot.”
We advocate locally based income tax because we believe that such a tax would be much fairer to the public. We do not assume that such a tax would necessarily be better able to withstand pressures than property taxes; nonetheless, a locally based income tax would have additional benefits.
Q15. Will it take 7 years to introduce the LIT system? Sir Michael Lyons anticipates that it will take six to seven years to introduce the fairer LIT system(Summary, P222).
Thorough preparations would have to be made to implement the suggested taxation system but properly planning the process of legislation would allow the HMRC to do much of the necessary preparatory work, while the main legislation makes its way through Parliament, thereby reducing the amount of time it would take to introduce the tax, which we believe could be accomplished in three or four years.