Council Tax bills will rocket for poorest households from April

Low-income families will see their council tax bills rise by up to £600 a year from April, a study by the Resolution Foundation reveals today.

As a result of council tax benefit reform, the report shows that three-quarters of local authorities are set to demand increased payments from the 3.2 million poorest working-age households who currently pay either no council tax or a reduced charge.  Families are facing a hike of more than 330 per cent in the most severe cases.

It comes as the government hands responsibility for council tax support to England’s 326 local authorities, along with a 10 per cent cut in funding  for it. The government has insisted that pensioners are fully protected from any rise under the new localised system, known as council tax support, meaning that working-age households will bear the full brunt of the changes.

Councils must decide by January 31 what type of system they will introduce.  The Resolution Foundation report, No Clear Benefit, shows that while some will meet the funding shortfall by cutting other parts of their budget, 74 per cent  of local authorities plan to demand a new or higher payment from the lowest-income households.  As a result,  many households with no one in employment who are currently exempt from council tax will have to pay the tax for the first time – typically between £96 and £255 a year. There are 2.5 million households receiving council tax benefit and with no one in work.

Councils are adopting a variety of schemes of differing severity. At the higher end, a third have opted to charge affected households an extra 20 per cent of the full  council tax bill. In some cases councils are taking even more stringent measures such as including child benefit in the calculation of a family’s income.

As well as hitting workless households, these changes will greatly increase bills for many of the 670,000 households who have at least one person in work but are on incomes low enough to receive some support under the current system.

The most severe rise would affect a single part-time working parent on the minimum wage.  A parent in this position who currently pays £173 a year of the £1,126 council tax bill for a Band B property will become liable for an extra £577 a year.  A person in the same circumstances but living in a higher-value  property, will see their bill rise by more than £600.

Households with two earners, and therefore already paying a larger share of a full council tax bill, will see rises of between £59 and £170 a year under the same type of scheme.

Councils which do not declare their intentions by 31 January will not be able to raise extra payments from benefit recipients and will have to absorb the full 10 per cent cut in central funding from other parts of their budget.

It is estimated the government will save £410 million a year through the move to the new system of council tax support. For the first year only it will spend up to £100 million on a transitional relief scheme to help local authorities who introduce systems which do not ask for more than 8.5 per cent of a full bill from people currently paying nothing and which maintain “positive incentives to work”.

The Resolution Foundation report also points out that many councils are setting aside a contingency fund to cover non-payment of council tax under the new regime. With some people who were previously exempt being asked to pay £2 a week, the costs of pursuing non-payers in court may outweigh the revenue to the local authority.

The change also has major implications for the introduction of universal credit later this year because different local rates of council tax support may undermine the financial incentives to work which universal credit is intended to provide. The government says that “virtually no households” will lose more than 80 pence in the pound for every extra hour worked. Yet the Resolution Foundation report shows that nine in 10 of those who will be on universal credit and who also receive council tax support look set to face exactly that – effective tax rates of around 81 pence.

Council tax payers in Scotland and Wales are unaffected because their devolved administrations have said they will cover the 10 per cent cut in funding imposed from Westminster.

Gavin Kelly, chief executive of the Resolution Foundation, said: “Millions of England’s poorest households – both in and out of work – are already very close to the edge given falling wages,  tax credits and benefits.  Very few of those currently exempt from paying the full rate of  council tax are expecting a large new bill to drop onto their doormat this spring. When it does they are going to find it hard to cope. The new system will result in hard-pressed councils spending scarce resources  chasing some of the poorest people in the country for non-payment.”

Matthew Pennycook, author of the report and senior analyst at the Resolution Foundation, said: “The axeing of council tax benefit has major implications for universal credit which is supposed to be all about simplifying welfare and giving people a stronger incentive to work. These changes undermine both goals. There will now be a highly complex and confusing patchwork of local support, while the low paid will keep even less of an extra pound in earnings than the government has claimed.”
Notes

1. No Clear Benefit, by Matthew Pennycook and Alex Hurrell is available in advance to the media from the Resolution Foundation press office and will be published online at www.resolutionfoundation.org on Thursday 31 January.
2. The study incorporates results from the New Policy Institute which collected details of the intentions of 184 of England’s 326 local authorities.