Labour lifts 5% council tax cap for six southern areas

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Labour has decided to grant six councils in the London area and its surroundings increased authority to impose higher council tax rises following a reduction in their government funding allocations. The councils affected—Kensington and Chelsea, Westminster, Wandsworth, Hammersmith and Fulham, City of London, as well as Windsor and Maidenhead—will have the ability to raise their council tax rates by more than 5% for a two-year period without requiring local voter approval through a referendum.

These specific councils are among those anticipated to receive less government funding in the near future, as part of a policy shift that directs more money towards deprived areas starting next year. Ministers have defended the funding changes by stating that the revised approach will create a fairer distribution of resources across England. By contrast, the Conservative Party has criticized the move, accusing Labour of seeking to “punish” councils that have traditionally maintained lower council tax rates.

The new funding framework, set to be introduced gradually over three years beginning in 2026, intends to allocate a greater portion of government support to English councils facing higher poverty levels and with a larger proportion of homes falling within lower council tax bands. According to Labour, these areas suffered the most from deep cuts to government grants during austerity in the 2010s, and the current formula, which has not been updated since 2013, inadequately addresses the increased demand for local services in these communities.

In response to concerns, a recent modification to the proposed rules aimed at lessening the financial impact on inner London councils included an adjustment for housing costs in the measurement of deprivation. Nevertheless, analysis by the Institute for Fiscal Studies indicates that the six councils granted additional flexibility in raising council tax remain among those projected to experience the most significant reductions in government funding. The think tank also noted that more deprived urban areas are projected to face greater overall increases, while outer London boroughs are expected to fare comparatively better under the new arrangements.

Those six councils will be permitted to increase their council tax beyond the 5% cap in 2026 and 2027 without triggering the usual requirement for a local referendum. The Department for Levelling Up, Housing and Communities explained that this exception applies because these areas currently have “very low” council tax rates, with Band D households paying between £450 and £1,280 less than the England-wide average. Historically, no council has succeeded in securing voter approval to raise rates above the 5% threshold, although some councils under severe financial pressure have been granted government permission to exceed it in recent years.

Examples of extreme council tax hikes in struggling councils include Birmingham, where residents faced increases exceeding 17% over the last two years due to a near bankruptcy situation, and Croydon, which raised its rates by 15% in 2023. The Conservative Party responded to the funding review by claiming it would “punish councils that keep council tax low” and shift funds to “badly-run Labour councils that spend irresponsibly.” Shadow local government secretary Sir James Cleverly warned that councils losing government support will be compelled either to cut services or impose significant council tax increases since the referendum safeguard has been removed.

Reform UK also criticized the funding arrangements, arguing they will disadvantage rural communities by channeling money towards Labour-controlled councils in London and other cities. The government’s announcement comes alongside confirmation that total council funding will increase by £3.9 billion next year—a rise of 5.8%—based on the assumption that all councils raise council tax by the maximum permitted 5% increase

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