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CHAPTER FIVE: TAXABLE INCOME

WHAT INCOME SHOULD BE TAXED

5.1 The Scottish Government proposes that local income tax would be paid on all earned income that is currently subject to UK income tax. This includes income from employment, pensions and other sources of income. Income from savings and dividends and other types of unearned income, such as gifts or loans would not be subject to income tax due to the potentially prohibitive cost and bureaucracy associated with collecting these types of income may prove.

5.2 Respondents were asked for their opinions on the types of income which should be subject to a local income tax and chart 5.1 shows the level of support for applying taxation to various forms of income.

Chart 5.1
Question 5 - Among the following, which should or should not be taxed as part of local income tax?

Base: Individuals (418)

Individual responses

5.3 Around three-quarters of respondents were in favour of taxing earned income (79%) and income from second homes (72%). Opinion was fairly evenly split as to whether tax should be paid on pensions or on financial investments. Thirty percent were in favour of taxing income from savings. Numbers not responding to this section were fairly low; 7% or less.

5.4 Over 90% of those in the older age ranges (55 and over) supported taxing earned income. Perhaps more surprisingly the 55 and over age ranges were also more likely to favour taxing income from pensions as can be seen below:

• 23% of 18 to 34 years olds;
• 52% of 35-44 year olds;
• 38% of 45 to 54 year olds;
• 55% of those aged 55 to 64;
• 65% of those aged 65 and over.

5.5 There was little difference across age ranges on whether to tax income from savings, financial investments or second homes. Across all parts of question 5, men were slightly more likely to agree than women that taxation should be applied. The greatest difference in opinion between genders occurred on the question of whether income from second homes should be taxed; 76% of men felt that income from second homes should be taxed compared to 68% of women; opinion was closest on the question of taxing income from financial investments; 49% of men and 48% of women felt this income should be taxed.

5.6 Looking at the individual qualitative responses, 4 out of 12 specifically addressed the issue of what should and should not be taxed, but touched on different concerns. Two argued for a tax on all income whilst one questioned why savings and financial investments were not to be taxed. Of the 4 responses, 2 predicted a possible avoidance of tax by limited companies through the transference of income into dividend payments which would not be covered by local income tax.

Organisational responses

5.7 Looking at the organisational data on incomes which might be taxed shows the following levels of support:

• taxation on earned income was specifically supported by 25 out of the 86 organisations who responded to the consultation (12 from local government, 9 from 'other' and 4 from tax, pay and finance) while 2 organisations, from the 'other' category, disagreed;
• 22 organisations (12 from local government, and 5 each from 'other' and tax, pay and finance) supported taxation on income from pensions with 6 'other' organisations disagreeing;
• 19 organisations (11 from local government, and 4 each from 'other' and tax, pay and finance) voiced support for taxation on income from savings although 7 'other' organisations and one from local government disagreed;
• taxation on income from financial investments was supported by 23 organisations (11 from local government, 7 from 'other' and 5 from tax, pay and finance), disagreement came from one local government and 4 'other' organisations;
• 23 organisations (10 from local government, 9 from 'other' and 4 from tax, pay and finance) wanted to see taxation on income from second homes, 2 local government and 2 'other' organisations disagreed.

All forms of income should be taxed

5.8 Nine of the organisations who offered their views in relation to this question, agreed that all forms of income should be taxed as the following quote illustrates:

"If the intention is to tax a person's income, then in the interest of fairness the tax should apply to all income streams."

(tax, pay or finance organisation)

5.9 The following paragraphs summarise the reasons given by organisations for applying or not applying tax to the various forms of income.

Pensions

5.10 In terms of taxing pensions as part of the local income tax, there was some uncertainty from one retail/ business organisation over whether local income tax would apply to salary net of pension contributions, as per current income tax arrangements, or if it would be liable on gross salary. One equality organisation also noted:

"While many older people will be better off under the Scottish Government's proposals, 33% of single pensioners and 12% of pensioner couples will be no better off."

Second homes

5.11 In terms of taxing income from second homes, one local government organisation was of the opinion that exempting earnings from second properties would undermine the principle of fairness, since people who can afford second properties should be able to contribute the tax from the income they derive.

5.12 A different local government organisation was of the view that it would be administratively burdensome and costly to continue a system of second home taxation when the basis for doing so (i.e. property values under council tax) has been abolished. Second homes tax will be discussed in more detail as part of question 20.

Savings and investments

5.13 There were many comments received from a wide range of organisations in relation to taxing unearned income from savings and investments as part of the local income tax. This consisted of comments from 13 local government organisations, 6 tax, pay or finance organisations, 3 trade unions, 2 political organisations, one legal organisation and one retail/ business organisation.

5.14 Amongst these organisations, 2 were in favour of exempting unearned income from local income tax. One tax, pay or finance organisation noted "a tax on savings and investment could discourage savings which could potentially result in a future dependence on state funding should circumstances change." This organisation believed "People should be encouraged to save and to invest in business in Scotland to promote economic growth".

5.15 The general consensus however amongst organisations was that on the grounds of fairness exempting income from sources such as savings and financial investments cannot be defended:

"The consultation proposal omits unearned income from the tax. Fairness will therefore be impaired given that unearned income, which for some may be the main source of income would not be the subject of local tax."

(local government organisation)

"In general terms having as broad a tax base as possible shares the burden and satisfies the key principle of fairness. People whose income comes from one source should not be at a disadvantage to those whose income comes from another source or sources."

(local government organisation)

5.16 The following list provides a summary of organisations' main concerns in connection with excluding income from savings and investments from local income tax:

• a failure to tax this form of income would undoubtedly favour the wealthier members of society (2 local government and one legal organisation);
• local income tax will hit working individuals and families hardest (one local government organisation, one tax, pay or finance organisation, one representative group);
• it is not clear why it is fair to levy local income tax on pension income and not on savings income (one political and one retail/ business organisation).

Tax avoidance

5.17 In addition to the above, 12 of the 86 responding organisations also highlighted the potential for tax avoidance and aggressive planning, or minimising tax liabilities, as a result of exempting savings and investments from local income tax. This consisted of mostly comments from tax, pay or finance organisations (6) but also included comments from 3 local government organisations, one legal organisation and 2 trade unions:

"It is intended that investment income will not form part of the charge to local income tax, this could lead to an increase in corporations and taxpayers extracting cash in the form of dividends rather than salary to avoid local income tax, or for those already trading via a company, altering their financial package to ensure that the majority of remuneration is extracted as dividends rather than salary."

(tax, pay or finance organisation)

"The wealthy can take their bonuses in shares rather than wages, they can hide their earnings in overseas accounts, they will invest in property, and people will lie about where they live."

(trade union)

"For some individuals there is a greater opportunity for tax evasion or avoidance under income tax. Individuals subject to PAYE have little chance of avoiding payment and the burden of taxation will fall most heavily on this group of taxpayers."

(local government organisation)

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