Government announces council tax reforms

The government has announced plans to reform the council system to bring fairer funding and more stability, while at the same improving people's lives across the country.

The proposals are intended to create a fairer system that reflects areas’ changing needs, differing delivery costs and the level of demand on front-line services.

The method that is currently used to fund social care will be overhauled so allocations are made based on the latest and best available data and recognise the areas where demand for council services is greatest.

The reforms will also scrap existing competitive bidding processes councils often have to go through for small pots of money.

There are proposals to recognise the remoteness of areas and account for the additional costs in delivering services in rural places, while for urban areas there are proposals to make sure that deprivation is properly recognised in the ‘assessment of need’ of councils.

Minister for Local Government and English Devolution, Jim McMahon OBE said: "We inherited a local government sector on its knees—councils pushed to the financial brink, facing rising demand, and working people not receiving the quality local services they rightly deserve. 

"There’s broad agreement across council leaders, experts, and parliamentarians that the current funding model is broken and unfair. This government is stepping up to deliver the fairer system promised in the 2017 Fair Funding Review but never delivered. 

"These reforms are urgently needed to put councils on a stable footing and ensure better services for residents — especially working people — right across the country. It’s a key part of our Plan for Change to deliver the outcomes people deserve."

Earlier this month, Councillor Claire Holland, chair of London Councils, warned that the reforms would be “make or break” for London Councils, with more than a quarter of London households living in poverty.

Although London Councils appreciated the focus on deprivation, it also emphasised that the measures would need to properly account of housing costs, as London has the highest rate of poverty in terms of country with these factored in. Therefore, failing to use accurate measures of deprivation which reflect housing costs would risk penalising deprived communities in the capital and other major cities.

London Councils has welcomed the decision to introduce a new formula for homelessness pressures, given the £330 million overspend boroughs incurred providing temporary accommodation in 2024-25.

This year, London boroughs are struggling with a £500 million black hole, with almost a quarter (seven) of boroughs relying on emergency borrow measures through the government’s Exceptional Financial Support programme. This is the highest proportion of any region in the country and accounts for almost a third of(£418 million) of the Exceptional Financial Support programme’s total of £1.3 billion.

Councillor Grace Williams, deputy chair of London Councils, said: “In the face of severe budget pressures, these funding reforms will be pivotal in determining boroughs’ financial future.

“It has been twelve years since the government formulae that determine so much of our funding were last updated. Change is long overdue—current funding certainly does not reflect the costs of sustaining London’s local services—but if we don’t get this right, we risk more boroughs being pushed towards effective bankruptcy. 

“We welcome the chance to shape the government’s plans. It’s vital that the resources we receive match the high levels of need, deprivation and cost of delivering services in the capital.”

The government has also unveiled plans to make changes to council tax to modernise the billing process to make it fairer, simpler and more supportive. 

Ideas being considered include more manageable 12 monthly billing by default, action to crack down on punitive punishment for missed payments and fairer treatment for the most vulnerable households.

Minister for Local Government and English Devolution, Jim McMahon OBE said: "As part of our Plan for Change, we’re putting working people first.  

"We are listening and taking action to make council tax fairer, more transparent and easier to manage. Under our plans, local government will be there to support, and not to punish, people who fall behind."

The announcement follows a campaign by MoneySavingExpert.com founder Martin Lewis and his charity the Money and Mental Health Policy Institute (MMHPI). Martin Lewis said: "Many parts of the Council Tax system are broken, and having called for some of these fixes for nearly 20 years, I’m delighted the government has listened and rapidly launched this long-due consultation, including many of the administration areas I hear the most complaints on.  “Council Tax rapid and aggressive debt collection methods currently hurt millions and disproportionately affect those with mental health problems. Within three weeks of missing a monthly payment many councils say you must pay for the whole year… ridiculous, how can people who can’t afford to pay for a month, suddenly pay for a year? After a further three weeks councils can call bailiffs in and rack up charges on charges. No commercial lender is allowed to behave like this, meaning constituents are treated worse than consumers. Worse, it’s counter-productive, can add to council’s costs and still doesn’t mean people can pay it back. The government has listened to our evidence, and this consultation thankfully looks at slowing it down, adding-in consideration, capping added costs, and pointing people towards help to pay.

"Plus, as council tax bands haven’t been revalued since the stop-gap drive-by valuations first done back in 1991 – while looking at that isn’t in the scope of this consultation – it’s only right that if people think they’re wrongly in too high a band, as 100,000s likely are, the government is consulting on making it easier to challenge, so people can pay the right price. The consultation is also proposing help for some of the most vulnerable – we’ve long campaigned on the horribly-named Severe Mental Impairment discount, which is underclaimed, overcomplex and underpublicised, and this gives an opportunity to move towards a simpler, more universal, less off-putting application process."