Councils will be given the power to deduct tax debts directly from employees’ wages in a controversial move experts have warned could worsen the financial distress of vulnerable individuals and put employers attempting to improve the financial wellbeing of their workforce in a bind.
An HMRC-led trial, set to launch on 8 July, will affect individuals in 29 different council areas who are in significant council tax arrears or have received an order to pay from a local magistrates’ court. Councils will have the power to deduct their debt directly from earnings through an employer.
The scheme marks the first use of the debt information sharing powers introduced by the Digital Economy Act (2017), enabling local authorities to obtain employer and income information from HMRC.
It is hoped the pilot will lead to a decline in the use of bailiffs to reclaim unpaid funds; bailiff fees can increase the cost of a missed council tax payment by more than 1,200 per cent, according to Citizens Advice.
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Deductions are already made from wages for student loans, and by agencies such as the Child Maintenance Service, but this move would potentially extend the power to a huge number of local authorities for the first time.
Will Berrington, a spokesperson for debt advice charity StepChange, told People Management automatic deductions from wages were likely to prove a “double-edged sword.”
He said: “On the one hand, council tax is a priority debt and recouping unpaid tax arrears in this way may make it less likely people end up with even higher costs and bailiff experiences, which can be massive in terms of cost and horrendous in terms of experience.
“But on the other hand, if the reason people aren’t paying is because of far wider financial problems, it may actually worsen or exacerbate that situation if they don’t also get high quality advice about their finances and debts.”
He added the scheme represented a conundrum for employers suddenly implicated in reclaiming employees’ unpaid debts while possibly simultaneously championing a financial wellbeing agenda.
“We’ve been tackling the issue of employers’ relationship with the financial security of their employees for a while now,” he said, “and this latest scheme points up the difficulty for employers who may – on the one hand – be trying to help their employees through various financial support schemes, and may find themselves on the other hand paying their employees significantly less than the employee is expecting, due to the attachment of earnings [notice] imposed through deductions at source by local authorities under this arrangement.”
The news comes against the backdrop of severe council funding cuts, with many local authorities complaining they are “completely in the dark” about how much funding they will receive next year.
Councillor John Mutton, cabinet member for finance at Coventry city council – one of the 29 taking part across England and Wales – said: “It’s important to work hard to maximise revenue collection, especially at a time when the national government is reducing the amount of funding it provides to local authorities.
“We need to keep improving, and linking with HMRC will allow us to potentially increase the money we put into vital frontline services and services for our most vulnerable residents. It’s about holding people to account.”
The pilot will last one year and will then be reviewed to see whether the scheme should be rolled out to all councils in England and Wales on a permanent basis.