IFS: Wealthier areas set to pay more council tax under government plans

Major reforms to English council funding could see wealthy areas with lower-than-average council tax rates paying much higher bills, a think tank has warned.

The government is mulling an overhaul of the council tax system to allocate more money to deprived areas. A consultation into local authority funding closes next Friday (15 August).

Under the proposed plans, people living in wealthy areas, including London and the home counties, would be hit with huge council tax increases, according to the Institute for Fiscal Studies (IFS).

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The IFS says the changes would create big “winners” and “losers” over the next three years, with some councils gaining substantially while others face significant cuts. Those that lose out on funding and have low council tax rates should be allowed to hike their rates beyond the annual maximum of 4.99%, it suggests.

Kate Ogden, a senior research economist at IFS, says the reforms will “sting” for those councils that are assessed to currently receive too high a share of the overall funding pot.

She adds: “The government should consider giving highly affected councils which currently have low council tax rates greater flexibility to bring their council tax bills up to more typical levels to offset funding losses.”

The IFS argues that because England has lacked an effective system for allocating funding to councils for nearly 20 years, the proposals will result in big changes in funding for some local authorities.

If the reforms were introduced in full immediately, one in ten councils would see a fall in their overall funding (including from council tax) of 14% or more, while another one in ten would see an increase of 10% or more, it says.

Sarah Coles, head of personal finance at Hargreaves Lansdown, comments: "Looking at the overall funding picture should hopefully mean fewer unexpected tax hikes out of the blue in the coming years.

"However, there is a risk that rebalancing funding will mean people in areas that have historically had low council tax could face a series of unpleasant rises."

To make it easier for councils to adjust, the government proposes to phase the new rules in between 2025/26 and 2028/29.

Which areas could pay more council tax?

Inner London, particularly its western parts, is set to be by far the biggest loser from the reforms, according to the IFS.

Camden, Hammersmith & Fulham, Kensington & Chelsea, Wandsworth and Westminster can expect their overall funding to be 11–12% lower in real terms in 2028/29 compared to this year, even if they increased their council tax by 4.99% each year.

Outside London, councils in the South East are set to see the smallest real-term increases, on average, of 7%.

Areas that have kept council tax low and have done well out of business rates revenue will also be hit, such as Cherwell, Mid Suffolk and North West Leicestershire.

Which areas could do well from the reforms?

Outer London will fare much better than inner London, on average.

Indeed, several outer London boroughs (such as Enfield, Havering and Hillingdon) are set to be among the biggest winners from the reforms, and could see their overall funding rise by about 20% in real terms over the next three years, if they increase council tax by 5% each year.

Outside the capital, councils in the East Midlands are set to see the biggest real-term increases in overall funding over the next three years (15% in real terms, on average), followed by Yorkshire & the Humber (12%).

The IFS points out that rural areas, which feared losing from the reforms, may fare better than expected. In particular, the average change in funding for the least densely populated 10% of council areas is set to be in line with the national average over the next three years.

Between 2025/26 and 2028/29, the average council is set to see an 8% real-term funding boost.

David Phillips, an associate director at the IFS, notes: "The scale of changes in funding some councils are set to face over the next three years reflects just how arbitrary funding allocations have become in the absence of a proper funding system."

What else is changing with council tax?

The government is also consulting on how people pay council tax, with the aim to “make life easier for working people”.

Under current rules, council tax can be paid in one lump sum or 10 equal monthly instalments, but you can opt to pay it 12 times a year instead.

The consultation proposes that the default way to pay the tax will be in 12 monthly instalments, rather than 10.

This will bring the monthly cost down by £38 per month for a band D household, according to the government, though the annual cost of council tax wouldn’t decrease.

In terms of the local authority funding allocations, Coles says that if your area looks set to see a council tax rise, it’s a good idea to consider how it might affect you in advance.

"You will have the space to consider where you can make cuts in your budget, or ringfence any pay rise between now and then to deal with the extra cost. In some cases, your calculations might reveal there’s no wiggle room at all, so there may be bigger and more difficult decisions to make about how and where you can afford to live," she tells MoneyWeek.