Council tax benefit: a tax rebate not a welfare payment

Council tax benefit is not technically-speaking a benefit at all but a council tax discount. And for those receiving CTB, council tax becomes a form of local income tax. So replacing CTB with the less generous CTS is not a welfare cut but a tax increase.

The replacement of council tax benefit (CTB) by council tax support (CTS) is portrayed as one element of the government’s programme of welfare reform. One of the problems with this is that the term ‘welfare’ has come to be used to refer to a multitude of different things. These differences are invariably important but they can often be quite subtle: for example, the different grounds on which someone who has lost their job is entitled to receive jobseeker’s allowance.

In the case of CTB, however, the difference is not subtle at all. There are two key features of CTB which need to be understood. The first is that it is really not a ‘benefit’ at all. Most benefits entail a transfer of money from the state to the individual or the family such as with state pension, jobseeker’s allowance, child benefit, tax credits, disability living allowance or even the winter fuel payment. And while housing benefit goes to the landlord rather than the claimant, it is still the case that the state is paying out money.

With CTB, this is not what happens at all. Nobody gets any money for CTB. It is not a benefit that flows from the state to the household. Instead, it is a reduction in the household’s liability to council tax. It is not a benefit but a rebate. Calling it CTR – council tax rebate – rather than CTB would be much more accurate.

The second key feature of CTB is even more significant. For anyone receiving CTB, council tax is transformed from a property-based tax into a local income tax.

This can be seen when you switch the focus from the discount received, to the remaining council tax someone is still required to pay. Many people getting CTB have low enough incomes that they are left with no council tax to pay. But what about households with a high enough income to pay some, but not all, of their council tax?

The crucial factor is what is called the CTB ‘taper’ – the rate that CTB is withdrawn as income increases.  This taper is set at 20%. This means that if someone with an income of £75 a week pays no council tax, someone with an income £5 a week higher (£80) pays £1 a week. Someone with an income of £85 has to pay £2. Someone with £125 has to pay £10.  And so on – until the amount of this ‘income-based’ council tax reaches the full amount of their property-based council tax. This is what they pay – and even if their income rises further it is all that they pay.

Although there are some important differences between council tax and ordinary income tax (for example, this local one depends on household rather than individual income), it is quite accurate to describe what is going on here as a form of income tax. The 20% CTB taper is in effect a 20% local income tax rate.

With almost six million households (more than a fifth) ‘receiving’ CTB across Britain, it is important that policy makers understand that replacing CTB by CTS is actually about redesigning the already-existing, local income tax. In particular, under the rules of CTB, an individual with an annual income of something less than £4,000 (or a couple with an annual income of less than about £6,000) pays no income-based council tax. Introducing minimum payments into CTS changes this. From April, minimum payments in CTS mean that the tax paid by those on low incomes is going up.