Fair Funding Review 2.0 and Administration of Council Tax

This Government were elected on a manifesto to fix the foundations local government so that taxpayers can once again rely on strong and reliable local services. After 14 years of service cuts and managed decline by the previous Government, councils across the country were on their knees. We are committed to delivering ambitious funding reform for local government based on need, alongside a renewed focus on prevention to get ahead of overwhelming pressures in adult social care, children’s services and temporary accommodation. We will work closely with the sector to reset local government so that it is fit, legal and decent and can once again reliably deliver for our communities. Today, we take the next step in our plan to ensure that local leaders have the systems and resources they need to deliver for their residents.

Too many areas have felt the combined impact of reducing Government support and low historical tax bases from which to raise income, coupled with high levels of need driving up demand for services. It is not fair that people in these places too often see hikes in council tax bills while neighbourhood services, which make areas clean, safe and decent, have felt the brunt of reductions. The current funding system is a decade old and reinforces the divide between deprived places and the rest of the country, and that is why we are taking action where previous Government failed. But this is not just about making the overall funding system fairer, this is also about making everyday life fairer for taxpayers too. This is a new settlement for councils and council taxpayers alike.

We took our first steps to reform local government funding through the local government finance settlement 2025-26, and today we are publishing a consultation on the next stage of our plans. As part of this, the formulae used to assess local authorities’ current needs, which are a decade out of date, will be updated to target money where it needs to go and ensure those places that have been overlooked get their fair share.

We will simplify the system and give security with multi-year settlements, reduce the vast range of small grants into simplified larger consolidated pots—scrapping bureaucracy and unnecessary reporting—and radically scale back wasteful competitive bidding. This will make funding more efficient, deliver better value for money for taxpayers and provide certainty to councils, turning the tide on micro-management from the centre, so that councils can spend their time and resources on services for local people, not filling out forms to satisfy central Government.

We will take decisive action to modernise the council tax system. This Government recognise that the administration of council tax has been left largely unchanged since 1993. This is why we are, in parallel, launching a consultation seeking views on changes to the administration of council tax which will support taxpayers with their bills and improve taxpayer experiences of the system—particularly for vulnerable groups.

We know we are facing huge financial challenges as a country. There is no magic wand, and fixing the foundations of local government requires tough decisions, on all sides. But with this bold action we can stem the tide of councils in financial crisis and allow the most disadvantaged places to reinvest in visible neighbourhood services and support for the vulnerable. It will take time and dedication to achieve this, and I urge everyone, inside and outside the sector, to share their thoughts on these proposals.

Today’s consultation on fairer funding reform follows the fair funding review launched in 2016 by the previous Administration but abandoned in 2022. We are finally following through where previous Governments failed. We launched a consultation in December, which sought views on the principles and objectives underpinning funding reform. Respondents were clear that reform is needed.

We will work with councils to fix what is broken, moving around £2 billion of funding to the places and communities that need it most and modernising council tax administration. We have made a start, beginning with the £600 million recovery grant in the 2025-26 settlement which started to correct the unfairness in the system by targeting money to areas with greater need and demand for services and less ability to raise income locally, and beginning the process of consolidating grants into the settlement. In this year’s spending review, we have taken decisive action to allow councils to reliably deliver for their residents by confirming an additional £3.4 billion of grant funding for local authorities over the spending review period. This is above and beyond additional funding for services provided outside of the settlement.

The last time that funding was allocated to local authorities using an updated set of funding formulae that sought to account for local authority differences in demand, costs and council tax raising ability was in 2013-14. This failure to update since then and the subsequent mismatch between funding and need has manifested in unequal outcomes for people and places.

Our up-to-date system will use the best available evidence to take account of the different needs and costs faced by councils in urban and rural areas, and the ability of individual local authorities to raise council tax. This means no one will suffer from deteriorating services just because they live in an area with low house prices or high demand for social care, or in a rural part of the country. We are also inviting views on resetting the business rates retention system to restore the balance between rewarding business rates growth and aligning funding with need. After the consultation and once finalised, the changes will be implemented over three years, beginning in 2026-27 through the first multi-year settlement in a decade.

As part of this, we are inviting views on a package of transitional arrangements to enable councils to deliver service transformation and efficiencies. We recognise that there is a balance to strike between directing funding where it is most needed and allowing authorities time to plan for changes.

We are also moving away from wasteful competitive bidding pots and restrictive reporting requirements to give local leaders the flexibility they need to deliver. We intend to deliver at least four consolidated grants through the settlement which bring together funding to support prevention and service reform, including a homelessness and rough sleeping grant, a public health grant, a crisis and resilience grant and a children, families and youth grant. We want to update the new burdens doctrine, allowing local authorities to plan more effectively. Building 1.5 million homes is a cornerstone of our plan for change, but we also have heard clearly that the new homes bonus is an ineffective incentive for new house building. We are therefore proposing to end the new homes bonus, and return the funding to the core settlement, to be allocated where it is needed most.

The consultation brings together opportunities and interactions across funding reform and devolution, local government reorganisation, and reforming local government burdens. We invite views on the role the settlement could play in funding strategic authorities, the treatment of reorganised authorities and reducing unnecessary burdens on local government. Additionally, we are inviting views on where it might be appropriate to update some sales, fees and charges, to support the financial sustainability of key services without placing an unreasonable burden on service users.

Today’s council tax consultation explores opportunities to modernise and improve the administration of council tax to deliver a fairer and more efficient system for taxpayers and local authorities.

Council tax is vital in ensuring councils have the funding they need to deliver essential public services. It is therefore right that council tax avoidance is not tolerated, and councils have reasonable powers to recover unpaid council tax. However, it is also right that households are not subject to disproportionate enforcement action and that they can access support they are eligible for. While many councils have shown strong leadership in this area, we know that this balance has not always been struck, and there are too many cases of vulnerable taxpayers bearing the brunt of heavy-handed collection by councils and their contractors.

We believe we can be both firm on deliberate tax avoidance, and fair to those needing support. Therefore, this consultation explores proposals to end unacceptable, aggressive collection practices that have seen vulnerable people who miss payments subjected to unmanageable lump sum payments and liability orders, which can lead to bailiffs being sent in, without the offer of a payment plan or a welfare check. These practices do not benefit councils, who can incur costs seeking punitive measures without recovering the tax in question, nor residents, who do not see improved services as a result of attempts at this sort of recovery. Put simply it is self-defeating and lacks common sense.

The consultation also looks more broadly at wider opportunities to make improvements to local government efficiency in the collection and administration. It also looks to make changes to support taxpayers with their bills and enhance their experience with the system. This includes proposals to spread council tax payments over 12 monthly instalments by default, saving the average band D household £38 a month by spreading the total cost across more instalments. Councils will still have the flexibility to offer taxpayers, on request, the option of retaining the current default of 10 monthly instalments. We will also make changes to help taxpayers better hold councils accountable for how their taxes are spent. It also considers the outdated nature of the “severely mentally impaired” council tax disregard, seeking to bring its name and definition in line with modern parlance to reduce the stigma around accessing the support it offers. We are issuing a call for evidence on people’s wider experiences with existing support in the system, including views on the effectiveness of council tax disregards for carers and apprentices, wider support with council tax bills Government might consider, and potential future changes to the process of appealing a home’s council tax band.

We know these issues are complex, and we are ready to make difficult decisions where they are the right decisions. We therefore particularly urge residents as well as the local government sector to share their views on this consultation on the administration of council tax.

The consultation on the fair funding review 2.0 will be open for eight weeks, closing on 15 August 2025. The consultation on council tax modernisation is open for twelve weeks, closing on 12 September 2025. We encourage views from the sector and beyond on each of these consultations.

This written ministerial statement covers England only.

[HCWS724]