Wealthy areas with lower-than-average council tax rates will have to pay more under new government plans, a leading think tank has warned.
Deputy Prime Minister Angela Rayner is mulling an overhaul of the council tax system to allocate more money to deprived areas.
It will mean households in wealthy areas, including London and the home counties, will be hit with huge council tax increases, according to the Institute of Fiscal Studies (IFS).
How will your area be affected and are there more council tax rises on the horizon?
Why could some households pay more council tax?
Angela Rayner is consulting on reforms about how funding is allocated between local authorities in England and how much councils can raise via council tax.
The IFS report suggests the changes will see around a quarter of councils lose money in real terms, and there will be ‘winners and losers’ as ministers try to address different levels of funding across the country.
Council tax hike: Angela Rayner is consulting on reforms about local authority funding
However, this means that cuts in funding in wealthy areas that have managed to keep council tax bills low will have less money to spend, even if they increase prices by the maximum amount.
The IFS says these councils should be able to make it up by increasing their rates beyond the current cap.
IFS senior economist Kate Ogden said: ‘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 Government proposes a ‘notional’ tax rate which will be equal to the average council tax across all councils to help equalise the amount local authorities can raise.
One area of consideration is offsetting central government grants against what local authorities could raise from council tax.
The IFS says it shows ‘just how large the funding changes some councils are set to see are’.
Which areas could be affected?
The IFS says the biggest losers will be inner London boroughs, particularly in Sir Keir Starmer’s constituency Camden, Westminster and Kensington and Wandsworth, which has one of the lowest council tax bills.
A Band H property – worth over £320,000 – in Westminster pays £2,034 a year in council tax. A house in the same band in Bishop Auckland, Durham, pays £4,279.
Areas that have kept rates low and ‘done well out of business rates retention’ will also be hit, according to the IFS, which also singled out Cherwell, Mid-Suffolk and North West Leicestershire.
How much could council tax increase by?
Some households have already suffered significant council tax increases this year, after the Government gave the green light to increase rates by as much as 9 per cent.
The IFS report suggests some councils could hike rates higher than the 4.99 per cent maximum rate that can be imposed without the need for local referendum or applying to ministers for permission to raise rates.
It says that the average tax rate proposed by the government would increase in line with Office for Budget Responsibility (OBR) forecasts, and the actual council tax rate charged by local authorities would increase in line with the cap.
What could it mean for your local council?
The new reforms are expected to help lower-income households but it is likely to have a knock-on effect on local services, such as adult social care and bin collections.
If the reforms were introduced this year, inner London councils would suffer budget cuts of 19 per cent, while the north and Midlands would have increases of up to 6 per cent.
There is no word on how the government will decide which areas are wealthy and which are deprived. It is likely to face backlash on how it is measured, too.
Some London boroughs like Islington and Kensington and Chelsea are generally considered wealthy, but pockets are among the most deprived in the country.
Will there be more council tax rises next year?
The IFS predicts Rayner’s reforms will be staggered over three years so these proposals are unlikely to start immediately.
Local authorities will still need to make up funding shortfalls and therefore it is very likely that they will need to hike rates again next April.
It means households could pay up to 4.99 per cent more than they are currently, but increasing numbers of near-bankrupt councils could apply to the government to hike as much as 9 per cent.
