WIREDGOV

An examination of council tax support schemes across England, Scotland and Wales, and the case for reform

Council tax support is a benefit available to low-income households, giving them a reduction in their council tax bill. It operates separately from universal credit – the main means-tested working-age benefit. And, since 2013–14, the working-age council tax support scheme has been designed and administered by local authorities in England, and the national devolved governments of Scotland and Wales. The scheme is a small fraction of total benefit spending, but plays an important role in supporting the incomes of the poorest households, on average contributing over £500 per year for the poorest tenth (worth 6% of their income).

Local authorities in England now operate a wide range of schemes, with substantially differing choices over generosity and means-testing. Localisation gives councils the ability to vary schemes based on local political preferences, objectives or constraints. But localisation has also generated administrative costs for councils, including the burden of effectively designing their schemes. Local policy reforms have in some cases increased complexity for claimants and lacked clear rationale. 

Integrating working-age council tax support into universal credit is therefore a compelling option for reform.

These are among the findings of a new report, published by the Institute for Fiscal Studies. The report also finds:

• Since localisation of council tax support in 2013–14, local authorities in England have reduced the aggregate size of their working-age council tax support schemes by around £630 million (14%) in today’s prices, following reductions in central government funding. The devolved governments in Scotland and Wales have maintained the level of generosity of their schemes.
• Reductions in funding have hit the poorest households the most, reducing their disposable incomes by £106 a year (or 1%) on average. 
• The fact that working-age council tax support operates separately from universal credit weakens incentives to work. A typical scenario for a low-income claimant increasing their earnings by £100 would be to see £55 clawed back in universal credit and a further £9 lost through lower council tax support, implying an effective marginal tax rate of 64%. In some cases, more will be lost.
• Many councils have adopted ‘banded schemes’ to simplify their administration, where entitlement to council tax support is based on which ‘band’ of income a claimant is in, meaning it drops suddenly when income crosses a threshold. This creates very high marginal tax rates for some people. In addition, the precise way in which many banded schemes have been implemented means they sometimes are – for no very clear rationale – less generous to some groups than others. Working renters, for example, sometimes lose out compared with otherwise-identical working homeowners.

These complications suggest there are good arguments in favour of integrating council tax support into universal credit for working-age families in England, and offering the devolved governments the option to have their working-age schemes integrated into universal credit:

• Integration would make the system more transparent for claimants and make it easier for them to get their full benefit entitlements, while also reducing administrative costs for councils.
• It could also strengthen work incentives for most low-income households, though straightforward options to achieve this entail either spending more or reducing the incomes of poorer households.
• On the other hand, localisation allows policymakers to tailor schemes to the needs or preferences of their population and to reflect other local constraints. This would not be possible to the same degree were support fully centralised. 
• But even with working-age council tax support integrated into universal credit, it would be possible to maintain some local decision-making, by allowing councils to decide, for example, the maximum share of households’ council tax bills that contribute to the universal credit award.

If working-age council tax support is to remain separate from universal credit, there is a strong case for avoiding banded schemes. The intention was to end the need to reissue bills after small changes in income, but smaller tweaks, such as assessing income over six months or a year instead of monthly, would be less disruptive for claimants.

Matthew Oulton, a Research Economist at IFS and an author of the report, said:

‘In devolving council tax support to local authorities in England, the government introduced local control over a part of the benefits system. But localisation has imposed a burden on councils to both design and administer a complex scheme. In many cases, local reforms seeking to ease administrative costs have, from the claimant’s perspective, added complexity to an already complicated system. Banded schemes mean claimants are sometimes made worse off when they earn more, and they sometimes leave some groups with lower entitlements, such as working renters compared with working homeowners, without any clear rationale. 

‘There is a strong case for integrating council tax support for working-age families into universal credit. This would not be without a downside: any form of integration could create some losers among both claimants and local authorities and could create risks for local authority finances if not handled correctly. However, integration would reduce complexity for claimants and administrative burdens for councils.’

How does council tax support shape household incomes and work incentives?