Labour lifts council tax cap for six London-area councils

Six councils in and around London will be allowed to raise council tax by more than 5% for two consecutive years without a local referendum, under a government funding reform associated with Labour that reduces their share of central funding. The six areas identified are Kensington and Chelsea, Westminster, Wandsworth, Hammersmith and Fulham, City of London, and Windsor and Maidenhead. The change is part of a three-year phase-in starting in 2026 that aims to shift a greater share of government funding toward councils serving more deprived populations and areas with a higher housing-cost burden relative to tax revenue.

The government says the reform will make England's funding model fairer by directing more support to councils facing higher demand for services and tighter tax bases, while those with lower tax bases and tighter funding see adjustments. Conservatives have criticized the move as a punishment of low-tax councils and a subsidy to urban, and particularly Labour-dominated, authorities. They argue that the shift could force cuts to services or higher bills in places that maintain lower council tax rates.

Analysts at the Institute for Fiscal Studies have noted that even with the adjustments, the six councils granted extra flexibility remain among those facing substantial declines in their share of government funding. The think tank also emphasized that more urban and deprived areas are set to see larger increases in funding under the broader reform, while some outer London boroughs could fare comparatively better. The IFS has previously suggested outer London areas would benefit more, even before tweaks to deprivation calculations were applied.

The local government department said the six areas were identified because of their historically very low council tax rates, with households in Band D paying between £450 and £1,280 less than the English average. The department stressed that the change is intended to reflect higher service demand in these areas, including housing costs, and to rebalance support toward communities with greater needs.

No council has ever secured a referendum to raise council tax beyond 5%. In cases where authorities faced dire finances in recent years, they have sometimes secured special permissions to exceed the cap, but such approvals have grown rarer as councils navigate austerity-era cuts and shifting grants. Officials note that the national trend remains contested and that the new framework is designed to avoid automatic punitive outcomes for low-tax districts while still allowing more stressed areas to raise funds locally when necessary.

The government confirmed that the overall level of council funding is set to rise by about £3.9 billion next year, a 5.8% increase, provided all councils lift council tax by the maximum 5% permitted across the board. Supporters say the package acknowledges the constraints of higher-deprivation areas and rising service costs, including housing and social care pressures, and will help ensure that funding matches local demand more closely. Critics, however, warn that higher bills could amplify financial pressures on households in the affected districts and could lead to reductions in services or expanded waiting times if budgets do not keep pace with demand.

Birmingham has faced tax increases above 17% in the past two years to balance its books after near-bankruptcy, while Croydon raised its rates by about 15% in 2023. Industry observers say such cases illustrate the breadth of the funding challenge that the reform seeks to address, though they caution that changes in one part of the system can have ripple effects elsewhere. As the six London-area councils prepare for 2026–27, local leaders will weigh the new powers against community expectations, possibly revisiting service priorities and efficiency plans to manage the financial impact on residents while continuing to deliver essential services.

Overall, the policy underscores a broader shift in England’s local-government funding framework, moving away from uniform grant distributions toward a model that aims to reflect deprivation levels, housing costs, and local tax bases. Officials emphasize that the plan’s phased rollout—over three years from 2026—will allow councils to adjust budgets gradually while governments monitor outcomes and refine the approach. For now, six London-area councils will gain the option to raise local taxes beyond the previous cap without the need for referendums in the 2026 and 2027 budget cycles, marking a notable change in the balance between local autonomy and central funding in English local government.