House of Commons - Communities and Local Government Committee

Select Committee on Communities and Local Government Committee Eighth Report

2 Council tax benefit eligibility and entitlements

14. Dr Kenway, Director of the New Policy Institute (NPI), stated that part of the problem with council tax is that 3.2 million working age adults live in poverty and yet are still paying full council tax, and one and a half million children are living in poverty whose families still pay full council tax.[17]Some, but not all, of these households will be eligible for council tax benefit. The Government estimates that some 1.4 million adults living in poverty are liable to pay full council tax and that 600,000 children live in families below the poverty line which are not eligible for any council tax benefit.[18]Research by NPI indicates that:

45 per cent of children in poverty are in households that get no council tax benefit, while a further 21 per cent are in households that get only partial council tax benefit. In 2002/3, this represented no fewer than 2.4 million children. Of these, a quarter of a million are in households whose income falls below the poverty line by an amount less than they pay in council tax—in other words, the council tax they pay may be said to be the immediate cause of their being in poverty.[19]

The Government has an ambitious commitment to eradicate child poverty in the UK by 2020. Given the Government's commitment to eradicating child poverty it is difficult to see how it can justify the maintenance of council tax benefit rules that even on its own estimates leave some 600,000 children living in poverty whose families are still liable to pay full council tax.

Council tax benefit and making work pay

15. Council tax benefit entitlement is determined on the basis of thresholds. The lower threshold is the level of income at or below which full benefit is payable. If income is above the lower threshold but under the upper threshold then claimants are entitled to some council tax benefit. The value of that entitlement is calculated on the basis that for every pound of extra income over the lower threshold, entitlement is reduced by 20 pence.[20] This formula is known as the council tax benefit taper.

16. Several witnesses argued that the way that this taper interacts with other tapers and parts of the tax system can be a disincentive to people moving off benefits and into work. People can be discouraged from taking paid or higher paid work resulting in what is often referred to as the poverty trap. Many benefits use tapers but of differing values: housing benefit has a taper of 65 per cent while for working tax credit it is 37 per cent and for council tax benefit, 20 per cent. Problems can also occur when benefit tapers interact. For example when a person goes into work and is in receipt of tax credit the housing benefit and council tax benefit tapers combine to mean that for each additional pound earned, the worker actually benefits by just 15 pence.[21] Peter McCann of Halton Borough Council argued that such steep tapers were a "huge disincentive" to work.[22] London Councils agreed, and stated that the tapers were a particular problem at the point at which a claimant begins earning income around the minimum wage level.[23] The two case studies below, detailing real circumstances, demonstrate the impact of such taper interactions on the decisions of people to return to work.

Case study one

"A Sussex CAB 48740928 07/11/2006 Worthing And District reported a case in which their client, a 34-year-old single male, was coming to the end of his drug rehabilitation programme and wanted to return to work since he had not worked for 10 years. The client was in receipt of long term incapacity benefit (IB), housing benefit (HB) and council tax benefit (CTB). The client had been offered a full time job, but was reluctant to accept it because he feared that he would be worse off because he would not be entitled to HB or council tax benefit. The employment was for 38 hours per week at £6.50 an hour. Because the client was on IB, he was not entitled to any extensions of benefit if he were to take up a job offer, unlike those who receive income support (IS) or jobseekers allowance (JSA). By returning to full time employment, the client would be entitled to working tax credit (WTC) but not to HB or council tax benefit. The client was therefore better off remaining unemployed and receiving benefits."[24]
Case study two

"A CAB in Somerset 68641350 23/03/2007 North Somerset reported that their client, a 46-year-old in receipt of incapacity benefit whose partner was not working and who had a 15 year old son, wished to start working for 40 hours per week, at £6.50 per hour. The client was receiving £30.90 income support; £44.38 child tax credit (CTC); £81.45, housing benefit; £22.42 council tax benefit and £76.65 non means tested benefits, which amounted to £255.80 in all. A calculation performed by the adviser showed that if the client proceeded with his intention to return to work, he would receive £44.38 CTC; £76.58 working tax credit (WTC); £17.45 non means tested benefits; plus £211.07 net income from work— £349.48 in total. However, the client would then need to pay rent & council tax worth approximately £103.87 per week meaning that overall the client would therefore be worse off. Unsurprisingly the client decided not to return to work."[25]

17. Sir Michael pointed out in his report on local government that the issue of work incentives is much wider than that of council tax reform. We agree. Any reform is "best considered in the context of wider welfare reform policy" but this should not be an excuse for inaction.[26] As the Institute of Revenues Ratings and Valuations (IRRV) argued, a Government review of the council tax benefit taper is long overdue but the issue has been "largely ignored by government" for some 20 years.[27] The council tax benefit taper, and its interaction with other parts of the tax and benefit system, can act as a disincentive to work. We recommend that the Government address this issue with some urgency and recognise the detrimental effects of the council tax benefit taper in its work on welfare reform.

Aligning council tax benefit thresholds

18. Government figures show that currently an estimated 700,000 adults are not eligible to pay income tax but are still liable to pay full council tax. Some of our witnesses believe that the upper council tax benefit threshold, above which households become liable to pay full council tax, should be raised to match the threshold at which income tax becomes payable.[28]Dr Kenway, for instance, argued that "the income-based council tax should be no more harsh for people than the proper income tax system".[29] Sir Michael examined the case for raising council tax benefit thresholds to match income tax thresholds in his report. His modelling showed that 1.6 million adults would be net beneficiaries of this change and the total cost would be £700 million.[30] He concluded that this is "unlikely to be affordable in the short term, though it has some advantages as an option for targeting support towards low-income households".[31] The Chartered Institute of Taxation pointed out that full alignment of council tax benefit thresholds with income tax allowances is impossible "while there are different bases of assessment, with income tax being based on individual income" and council tax benefit on household income.[32] As Sir Michael pointed out, any changes to council tax benefit thresholds for eligibility need to be considered against any consequential impact on other income-related benefits.[33] The Minister, James Plaskitt MP, agreed explaining that while the DWP was aware of perceived inconsistencies within the benefit system and was considering options for simplification, such matters had to be examined across the whole range of benefits. He added:

sometimes it could be the case that you can make an alternation in one part of the system that looks like a simplification but it might create another anomaly somewhere else.[34]

19. We recommend that the Government includes examination of the consequences of aligning council tax benefit eligibility thresholds with thresholds used in other parts of the tax and benefit system in its research programme.

The treatment of savings

SAVING LIMITS

20. At present households' savings are taken into account in the determination of eligibility for council tax benefit. In April 2006 the lower savings level was raised from £3,000 to £6,000. Savings over £16,000 remove any entitlement to council tax benefit except for those over 60 and in receipt of the guaranteed credit element of pension credit. Non-pensioners, no matter how low their income, will not qualify for council tax benefit if they have savings of more than £16,000.

21. A number of organisations have pointed to inconsistencies, illustrated in table 1, in the treatment of savings within the council tax benefit, pension credit, tax credit and income tax systems.

Table 1: Capital limits (as of April 2006)

Benefit Lower limit Upper limit

Housing Benefit, Council Tax Benefit (no upper limit for those getting Pension Credit guarantee credit) £6,000 £16,000

Income Support, income-based Jobseeker's Allowance (JSA) £6,000 £16,000

Pension Credit £6,000 None

Tax Credit None None

Source: CLG Committee

22. The use of the upper savings limit in determining eligibility means that people with broadly similar financial circumstances can receive markedly different levels of council tax benefit, as the following case study illustrates.

Case study three
"Couple A: Joint income of £285 a week including an assessed income of £8 a week from their savings of £10,000.
=  will receive council tax benefit of £16 a week
=  pay £17 a week in council tax equal to approx 6% of their income

Couple B: Joint income of £168 a week including an assessed income of £21 a week from their savings of £16,500.
=  no help with council tax
=  pay £33 a week equal to approx 20% of their income

Couple A are £6000 better off for the whole year. Yet it is couple A who receive over £800 in state help with their council tax bills. In this situation it is only rational for Couple B to spend their savings until they are below the savings limit."[35]

23. The Chartered Institute of Taxation argued for the abolition of the upper savings limit which, it pointed out, "leads to a cliff-edge situation in which a change of £1 in income or savings can lead to somebody going from paying all their rent and council tax, to paying none of it—or vice versa".[36] Ms Pearson of Help the Aged explained that the upper savings limit creates a situation where "for people who have savings over £16,000 the only rational thing for them to do is to spend the extra savings".[37] On this basis a disincentive to saving is embedded in the tax system. The Government acknowledges that raising the upper savings limit would "be likely to send positive signals about encouraging savings".[38]Other witnesses pointed to the 'meanness' of £16,000 savings limit. The IRRV said it had been held at an unrealistically low level.[39]

24. The use of savings limits in the council tax benefit system is consistent with the operation of some other benefits such as income support and housing benefit but not consistent with the tax system where savings (except for the income they generate) are ignored. If council tax relief is to be considered as a part of the tax system, as we believe it should be (see paras 47-50), it becomes hard to justify the continued use of savings limits.

25. Sir Michael investigated options for changing the savings limits for pensioners. His research showed that raising the upper limit to £50,000 would make an estimated additional 370,000 pensioner households eligible for council tax benefit, including some 135,000 of the poorest pensioner households. Abolishing the upper limit entirely would include a further 50,000 pensioner households.[40] Sir Michael recommended that the upper savings limit for pensioners should be raised to £50,000 immediately and that in the long term it should be abolished altogether.[41]

Table 2: Cost and impact of reform of council tax benefit upper saving limit for pensioners

Council tax benefit costs Likely to benefit Newly-entitled households weekly average gain

Increase upper capital limit to £50,000 for pensioners £195 million 370,000 pensioner households £10.10

Abolish upper capital limit for pensioners £220 million 420,000 pensioner households £10.00

Source: The Lyons Report, table 7.1

26. The cost implications of raising or abolishing the upper saving limit for pensioners are significant. Table 2 shows that it would cost the Government up to £195 million a year if the upper limit for pensioners was raised to £50,000, and up to £220 million each year if the upper limit was abolished for pensioners. Even the more expensive option of abolition would cost less in any one year than the £800 million devoted to the £200 one-off payment to pensioner households in 2005 and would target support more effectively.[42] The operation of tapers would still mean that income from savings would be taken into account even if the upper savings limit itself was abolished.

27. Sir Michael's proposals have support. Ms Pearson of Help the Aged, for instance, told us that the upper limit should be changed for pensioners because they "do not then have the opportunity to build those savings back up".[43] Others have argued that these changes should also apply to working age households. Mr Herbert of Citizens Advice argued that "we would not want to see pensioners disproportionately benefiting" from a change.[44]

28. The Government has not responded formally to Sir Michael's recommendations on the upper saving limit for pensioners but the Minister for Local Government, Phil Woolas MP, accepted that the current situation could be viewed as anomalous.[45] The Government also told us that "DWP is keeping the level of this limit under review".[46]

29. We urge the Government to consider sympathetically proposals to raise, and ultimately abolish the use of, an upper savings limit in determining eligibility for council tax benefit, not just for pensioners, but for all.

THE USE OF NOTIONAL INCOME FROM SAVINGS

30. At present the assessment for council tax benefit eligibility takes into account an estimate of income from savings (between £6,000-16,000) based on a set formula, not actual income. For working age adults, the rules of council tax benefit state that every £250 of savings is assumed to produce a weekly income of £1.

31. Citizens Advice argued that this is "unrealistic", as it assumes a rate of return of 10.4 per cent even though the current base interest rate is 5.5 per cent.[47] NPI stated that the implied rates of interest are "absurd".[48] The Charted Institute of Taxation called for the Government to review the notional income rate for savings.[49]The Minister, James Plaskitt MP, argued that it was incorrect to equate the notional income rate with interest rates and explained that the assumption behind its use is "that people will use savings in order to help pay the council tax" and that "the more capital you have at your disposal the more you will draw on it to pay your council tax."[50]

32. NPI argues that "to tax people on notional rather than actual income may be administratively convenient but it is also utterly unprincipled".[51] Citizens Advice pointed out that under the tax credits system actual, rather than notional, income from savings and investments is taken into account. It therefore argues that the use of notional income in determining council tax benefit eligibility should be abolished.[52] The Minister, James Plaskitt MP, stated that the Government has no plans at the current time to make any changes to the use of notional income, but that this issue is always kept "under review".[53]Although any changes to the use of notional income in council tax benefit need to be considered as part of wider reform measures, moving to the use of actual income to determine entitlement would be consistent with the treatment of council tax relief as a reduction in tax liability rather than a benefit entitlement.

Age differentials

33. Council tax benefit threshold levels vary according to age. Council tax benefit treats single people under 25 less favourably than people over 25.[54] Working age households start paying council tax at levels of income "little more than half the levels at which pensioners start paying".[55] NPI pointed out that every £1,000 of savings, within the thresholds, is assumed to yield an income of £4 per week for a working-age household but only £2 per week for a pensioner one.[56] This means that under the current rules working-age households are expected to draw upon their savings at double the rate of pensioner households.

34. The way in which back-dated claims are treated also depends on the age of the claimant. People over 60 may have benefit payments back-dated for up to 12 months "providing they can show that they qualified for the whole period".[57] Working-age people may only claim backdated payments for 12 months "if they can show they have a good reason for not claiming earlier".[58] The Chartered Institute of Taxation told us there was "no logic in this age distinction" and called for it to be removed.[59]

35. Some witnesses argued that any reform of council tax benefit should include removal of age distinctions: indeed the IRRV told us that reform would "not be sustainable in terms of age equality legislation" if the distinctions were retained.[60]The Minister, James Plaskitt MP, told us that the Government was committed to simplifying the benefits system as a whole, but pointed out that "it is sometimes not as straightforward as it might appear at first".[61] Even so, we believe that age-related anomalies should be removed unless there are clear and objective grounds for their continuation. The Government should review age-related anomalies in council tax benefit with a view to removing them as part of its work to simplify the benefits system for claimants.

17 Q 39 Back

18 Supplementary memorandum from the Department for Work and Pensions, CTB 21, para 2 Back

19 Poverty is defined here as households with an income below 60 per cent of the national median income. New Policy Institute, Council Tax Benefit for Working Age Households (March 2005), p 1 Back

20 Memorandum from the Department of Communities and Local Government and the Department for Work and Pensions, CTB 15, Annex 1, para 5 Back

21 Supplementary memorandum from Citizens Advice, CTB 20 Back

22 Q 29-30 Back

23 Memorandum from London Councils, CTB 4 Back

24 Memorandum from Citizens Advice, CTB 20 Back

25 Memorandum from Citizens Advice, CTB 20 Back

26 The Lyons Report, para 7.162 Back

27 Memorandum from the Institute of Revenues, Ratings and Valuation, CTB 11 Back

28 Memorandum from London Councils Back