Six local authorities in and around London have been granted new powers to increase council tax rates above the usual legal limit, following a reduction in their share of central government funding.
The affected regions Kensington and Chelsea, Westminster, Wandsworth, Hammersmith and Fulham, City of London, and Windsor and Maidenhead may raise tax rates by more than five per cent for two years without requiring a local referendum.
This move comes amid a wider government initiative to reallocate funding towards areas with greater poverty levels. The change is set to affect local services, council finances, and the wider debate over tax and spending in England’s communities.
Council Tax Rules Changed in Six Areas
From 2026, six councils in and around London will be permitted to increase council tax by more than five per cent annually for two years, bypassing the usual requirement for a local referendum.
This decision arises after these councils received a lower share of government funding, as the government updates the distribution model to favour more deprived locations. Authorities granted these powers include some of England’s lowest council tax authorities; households in Band D currently pay between £450 and £1,280 less than the national average.
No council in England has previously secured public approval via referendum to exceed a five per cent increase, though central government has occasionally permitted certain financially troubled councils to do so.
Aims of the Funding Shift
The revised funding system will be gradually introduced over three years from 2026. Its objective is to reallocate more central government funds to councils experiencing higher levels of deprivation and those with more homes in the lowest tax bands.
Government ministers state that the changes will create a fairer model for local authority funding across England. According to official statements, locations hit hardest by spending cuts during the 2010s austerity period often those with high demand for public services should now see greater support.
The funding formula, last altered in 2013, has been criticised for not reflecting current service pressures. Recent adjustments to the new rules reportedly include housing costs when assessing deprivation, partly buffering impacts on inner London councils.
Impact on Local Authorities
Despite these changes, analysis by the Institute for Fiscal Studies (IFS) highlights that the six councils given the new tax-raising powers face among the steepest reductions in government funding.
The IFS further notes that while heavily urban and deprived areas are now set for substantial increases in support, many outer London boroughs are likely to benefit more than inner London authorities under the new formula.
Councils across England are expected to review their budgets and services in response to these evolving funding streams.
Political Responses
The government’s approach has drawn criticism from opposition parties. Conservative Party politicians have argued that the new funding model penalises councils that have historically kept council tax low and rewards those described as “badly run”.
Sir James Cleverly, shadow secretary for local government, said, “Inevitably, councils that lose out will be forced to cut services or raise tax nd with referendum principles scrapped, those hikes will be big.”
Reform UK has also raised concerns, warning the new settlement may disadvantage rural areas, while funnelling more public money into “Labour-dominated London and city councils,” according to party statements.
National Funding Trends
Alongside the changes in local funding distribution, the government has confirmed that the total amount allocated to councils nationally will rise by £3.9 billion next year.
This figure represents a 5.8 per cent increase, contingent on all local authorities raising council tax by the full five per cent allowed under present rules. This context follows recent instances where councils in severe financial difficulties have received government approval for dramatic tax hikes.
For instance, Birmingham saw increases above 17 per cent over two years after issuing a Section 114 notice indicating effective bankruptcy. Croydon similarly increased tax by 15 per cent in 2023 to address fiscal challenges.
Final Summary
The new flexibility for council tax setting is expected to affect tens of thousands of households in the affected areas. Residents may face larger tax increases than previously anticipated as their councils respond to reduced central funding.
Local government leaders are now weighing how to allocate shrinking resources, prioritise critical services, or spread costs. The wider shift in funding signals ongoing changes as resources are diverted towards areas with higher needs, while local tax burdens may rise for households in better-off districts.
For residents looking to track changes in local tax and government funding reforms, digital platforms such as the Pie app can assist in simplifying council finances and spending decisions in evolving times.
