Households across England are bracing for significant council tax hikes in the coming years, following a sweeping overhaul of local government funding announced by the Labour government on December 17, 2025. The new measures, which have ignited fierce debate across the political spectrum, aim to address longstanding regional inequalities by shifting more central government funds from wealthier southern councils to deprived areas in the Midlands and North. At the same time, the government is lifting long-standing caps on council tax increases for six affluent London boroughs, paving the way for annual tax rises well above the previous 5 percent limit.
The Ministry for Housing, Communities and Local Government (MHCLG) unveiled a landmark £78 billion three-year funding settlement for England’s councils, the first such multi-year deal in over a decade. According to MHCLG, this settlement will boost councils’ core spending power by more than 23 percent over three years compared to 2024/25, offering local authorities a level of financial certainty unseen in recent years. Local Government Minister Alison McGovern told the House of Commons that the reforms are designed to "give local areas the tools to create opportunities, support families, and rebuild the services that hold communities together." She emphasized, "Deprivation doesn’t happen by accident – it’s the result of years of broken systems and wrong priorities. This settlement tackles that head-on by directing funding where it’s needed most."
Central to the reforms is a new funding formula that gives greater weight to deprivation, resulting in substantial increases for the poorest 10 percent of councils – an average 24 percent per head. Urban centers such as Telford, Blackpool, Manchester, Nottingham, Wolverhampton, and places in Yorkshire & the Humber are among the biggest beneficiaries. Detailed figures show that councils like Birmingham (45.3 percent), Bradford (46.9 percent), Barking and Dagenham (47.9 percent), and Luton (63.4 percent) will see dramatic rises in core spending power by 2028/29, assuming they implement the maximum allowed tax increases.
But the redistribution comes at a cost for wealthier areas, especially in London and the South East, where councils face deep funding cuts. Five London authorities with historically low council tax levels – Wandsworth, Westminster, Hammersmith and Fulham, City of London, and Kensington and Chelsea – along with Windsor and Maidenhead, will have the 5 percent cap on council tax increases removed for the next two years starting in 2027. These councils are now permitted to raise council tax as much as they deem necessary, without the need for a local referendum, a move that has sparked concern among residents and political opponents alike. According to MHCLG, around 500,000 households in these boroughs currently pay between £450 and £1,280 less than the English average for a Band D property, which stands at £2,280 for 2025/26. A standard 5 percent increase would push the average bill up by £114 to £2,394 – a 26 percent jump since 2021 – but with the cap lifted, actual increases could be much higher for some households.
While the government insists that all councils will be protected financially during the transition, with the new funding phased in to avoid service disruption, not everyone is convinced. Some of the councils granted the freedom to exceed the cap are reportedly sitting on reserves larger than their annual budgets, raising questions about the necessity of steep tax hikes. Earlier in 2025, six councils, including Bradford, were already permitted to raise council tax by up to 10 percent to stave off bankruptcy, with Bradford implementing a 9.99 percent rise. Meanwhile, Scottish councils increased their taxes by as much as 13 percent after a freeze was lifted earlier this year.
The reforms have triggered a political firestorm. The Conservative opposition has accused Labour of orchestrating a "nakedly political power grab" by "fiddling the funding model to punish councils that keep council tax low and moving funding to badly-run Labour councils that spend irresponsibly." Shadow local government secretary Sir James Cleverly was particularly scathing, stating, "Inevitably, councils that lose out will be forced to cut services or raise tax – and with referendum principles scrapped, those hikes will be big. This is part of Labour’s mission to hike council tax across the board. Hidden behind their rhetoric about supporting local government is a council tax bombshell, with the average family in a Band D home facing a cumulative £1,143 council tax increase across this Parliament. Under Labour, ordinary people are paying more for less."
Labour, however, insists the changes are about fairness and restoring services lost during years of austerity. Local government secretary Steve Reed said, "This is a chance to turn the page on a decade of cuts, and for local leaders to invest in getting back what has been lost – to bring back libraries, youth services, clean streets, and community hubs. Today we’re making sure every community has the funding they need to succeed." A Labour source added, "The days of Rishi Sunak shovelling money to Tunbridge Wells then bragging about it at garden parties are over. Deprivation is now back at the heart of council funding. The places that were devastated by Tory austerity will get the support they need to get back on their feet. This is the difference a Labour Government makes."
Local government experts and council leaders see both opportunities and challenges. Cllr Jeremy Newmark, finance spokesperson for the District Councils’ Network, observed, "As with any local government settlement there are winners and losers. While some councils are getting a reprieve from the prolonged period of spending restraint, other councils may have little option but to scale back services over the next few years." Cllr Steven Broadbent, finance spokesperson for the County Councils Network, warned, "Overall, the three-year settlement outlined today will be extremely challenging and will leave many of member councils facing a substantial funding shortfall over the course of this parliament. It is simply unrealistic to expect them to provide vital care services while receiving deep reductions in government grant and more councils may now have to apply for exceptional financial support."
Independent analysts have also weighed in. Kate Ogden, a senior research economist at the Institute for Fiscal Studies (IFS), remarked, "With councils’ finances still under pressure from rising demands and costs, the Government may find it hard to hold the line that limit-busting council tax increases will only take place in 'exceptional cases' and where bills are currently below average." She acknowledged the overdue nature of the reforms, saying, "Overall, it is welcome that the Government has finally grasped the funding reform nettle. For arguably two decades, England has lacked a proper system for allocating funding between councils. The new system involves subjective decisions that not everyone will agree with though, including the big redistribution of funding from more affluent to more deprived parts of England."
As the new funding formula takes effect in April 2026, just ahead of crucial local elections in May, the political and financial stakes are high. Councils will be able to keep all additional council tax from new homes, a new Recovery Grant will continue for areas hit hardest by underfunding, and upper-tier councils will have guarantees for above-inflation increases as they adapt. Yet, the reality for many households is a future of rising bills and, in some places, tough decisions about which local services can be preserved.
With council finances under the microscope and public services on the line, the coming years will reveal whether this bold attempt at rebalancing local government funding can deliver on its promises of fairness and renewal—or simply shift the burden in new and contentious ways.
