Why council tax gets increased every year by local authorities

Councils across the country are set to hike council tax in the coming weeks, to the frustration of many who have to fork out more money.

Rochdale Council is no exception, with a proposal to increase council tax by 4.99 per cent due to be decided at the full council meeting on 26 February. The extra cash goes towards balancing its budget, an annual legal requirement.

But the question on many taxpayers’ minds is why tax is increased every year.

The short answer is that it directly relates to how much government funding they get. When the government looks at dishing out council funding, they assume the local authority has increased council tax by the maximum amount (4.99 per cent in most cases).
 

Read more: Council tax rise planned for the Rochdale borough - have your say on budget cutsPublished: 07 February 2025

If a council does not increase council tax, they miss out on that increase in cash forever, because the chance to increase tax only comes once a year. Some councils, like Rochdale have done in the last three years, choose to use their reserves to cover the cost for their residents so they don’t feel the hit of the tax increase.

If they can’t set a balanced budget, local authorities risk going bust. The cash generated by the 4.99 per cent tax increase will mainly go towards adult social care costs and other council-run services such as waste collection, libraries, parks and children’s services. 

The main problem for councils is that they only have a few ways of generating income to fund their services. This is through council tax, sales, fees and charges, and investment income.

In terms of investment income, some councils are choosing to put money into businesses and projects in order to benefit from profits and dividends. An example of this is all 10 Greater Manchester councils investing in the Manchester Airports Group (MAG).

According to the Local Government Association (LGA), the growing importance of council tax as a funding source also means that the weaknesses in the tax are more problematic and pronounced. For instance: council tax: raises different amounts of money in different parts of the country, unrelated to need; is based on 1991 property values and has not been revalued since then; and is viewed by some as regressive in relation to property values.

Additionally, boroughs with more properties in a higher tax band (usually homes with higher value) would generate more income through council tax increases. So Rochdale Council would generate less cash from hiking tax than councils in more affluent areas of the country.

The LGA believes funding pressures and a lack of reform over recent years have weakened the financial sustainability of councils. They regard the current funding system as outdated and desperately in need of wholesale reform.

Councillor Louise Gittins, chair of the Local Government Association, said: “Councils hold the key to public sector reform which is a clear ambition of government. As leaders of their communities and major local employers, they must play a critical role in promoting sustainable and inclusive growth. 

“We know that there are huge financial challenges ahead for the government. However, sufficiently funding councils in the Spending Review would enable them to fully play their part in leading local growth priorities and unlock the full potential of their local people, businesses and places.

“Local government has made huge savings and efficiencies over the past decade and continues to innovate and transform services to get the best for residents and provide greater value for money.  

“However, without adequate investment now we risk not being able to deliver crucial services that so many depend upon and our desire to help the government fulfil its ambitions for the future are severely hindered.”

Last year, the government did announce £69 billion of funding to be injected into council budgets across England to increase spending power. £3.7bn of this would go to authorities with social care responsibilities to strengthen community care, invest in prevention and give children the best start in life.

Following that announcement on 18 December 2024, deputy Prime Minister, Angela Rayner said: “Local leaders are central to our mission to deliver change for hard-working people in every corner of the country through our Plan for Change, and I know our councils are doing everything they can to stay afloat and provide for their communities day in day out.

“We won’t take the easy option or shy away from the hard work needed to rebuild a more effective and efficient system. These kind of reforms won’t happen overnight, but we are determined to deliver fairer funding, ending postcode lotteries meaning everyone gets the support from public services they deserve.”

George Lythgoe, Local Democracy Reporter