Council tax bills set to rise in the south to fund the north

Times

20-06-2025

Council tax bills are set to rise across swathes of southern England to funnel more money to northern cities under radical Labour reforms to be set out on Friday.
Angela Rayner, the deputy prime minister, will set out plans for a 'progressive' redistribution of local authority funding designed to ensure more Whitehall money goes to areas with the highest needs.
She is expected to announce the move as a significant Labour reform designed to ensure that residents in poorer areas are not paying over the odds in council tax but receiving shoddy services in return. However, council chiefs warn the plans will be 'deeply divisive' as many wealthier areas in London and the home counties lose out.
About half of councils' income comes from central government and Rayner will announce plans for a new formula for allocating the money based on local needs, including population, poverty and age. This will lead to more cash going to deprived areas after her department said that the link between funding and local needs had 'broken down' and that reform 'will enable local authorities who have had to scale back services the most to catch up'.
Rayner has pointed to people living in cities in the north that are paying hundreds of pounds more in council tax than those in leafy southern areas. She said these residents were 'unfairly being asked to pay more for worse services'. The most extreme examples include the council tax for a three-bedroom semi in Hartlepool, which is more than an £80 million ten-bedroom mansion in Westminster.
Government grants to councils will also now be based on calculations of what local authorities could raise if all areas charged the same rates of council tax based on their local mix of housing.
The combination of the two changes will mean steep falls in grant income for wealthier councils, mainly in London and the southeast, forcing them to raise council tax rates to make up the shortfall or cut public services.
While some councils fear a 'bloodbath' as income collapses overnight and they are pushed into bankruptcy, ministers insist they will not let this happen. They are expected to promise a cap on how much councils' grant income can drop by, transitional protections for those that lose money, as well as extra weighting for rural and coastal areas with higher transport costs.
Rachel Reeves, the chancellor, insisted she will not change rules which limit councils to raising council tax bills by 5 per cent a year, unless they have permission from local residents in a referendum.
However, officials acknowledge that more councils are likely to apply for exceptional permission to raise tax above 5 per cent as they struggle to balance the books. While insisting these will be judged on a case-by-case basis, ministers have signalled they will look more favourably on applications from wealthier areas with historically low council tax rates.
Councils are also expected to get more freedom to increase fees and fines for services such as parking, and licensing which are often capped by central government.
One senior figure in local government, briefed on the plans, said the move would be 'deeply divisive' and create significant winners and losers.
'There is no doubt at all that it is going to be polarising,' they said. 'For a lot of councils in richer parts of the country the current system works quite well for them and they're going to lose funding.
'A lot of councils in rural areas are also worried that they will see their funding diverted into deprived urban areas.'
David Phillips, of the Institute for Fiscal Studies, said reform was overdue. 'It's been 20 years since we've had an effective system to allocate funding between councils so it is out of whack and the changes are going to be big,' he said.
'We would expect urban areas in the Midlands and north to benefit, and maybe some of the east London boroughs. But the Westminsters and Wandsworths of this world, which set very low council tax, will lose. If the referendum limit remains at 5 per cent they will be stuck, so the government needs to give them some flexibility to put up their council tax beyond that.'
• Who pays council tax and how does it work?
He added that home counties areas such as Hertfordshire, Surrey, Buckinghamshire, Wokingham and Oxfordshire could also lose out. 'Given the focus on equalising for council tax bases, which are much stronger in these leafier places, and reassessment of needs, you'd expect leafy areas to lose out and the more deprived areas to benefit,' he said.
Phillips added that if the government 'goes to the maximalist side on redistribution, then it is making a trade-off to prioritise need over incentives for councils to tackle need and grow their council tax base. They needs to be clear they are making that call.'
The Ministry of Housing, Communities and Local Government argues that the present system has resulted in 'perverse outcomes, where some authorities are struggling to provide basic services whilst others are better off'.
A spokeswoman said: 'Individual councils remain responsible for setting their own council tax levels each year, and the government is clear that they should put taxpayers first.'
Officials said the new system would 'ensure that government doesn't reward places that have been able to keep council tax levels low due to having stronger tax bases', and be 'fairer to local authorities and their residents where they have had to take difficult decisions historically on council tax, often due to having weaker tax bases'.
They said that 'adjusting fully for ability to raise council tax' would 'make funding available in such a way as to enable local authorities to provide the same level of service, regardless of their tax base'.
They argued that this 'promotes accountability' by allowing voters to judge councillors if they choose to hold down council tax by cutting services.