Government to overhaul funding methodology for local government

In a consultation on the changes launched on Friday (20 June), the Ministry of Housing, Communities and Local Government also detailed proposals to scrap existing competitive bidding processes councils often have to go through for small pots of money.

The eight-week consultation sets out how Whitehall plans to make funding allocations fairer for councils of all sizes and across all parts of England.

It asks for views on plans to recognise the remoteness of areas and account for the additional costs in delivering services in rural places.

There are also proposals to ensure that deprivation is recognised in the 'assessment of need' of councils so that services that support the poorest in communities are properly funded.

On social care, the consultation suggests updating the formula used to work out funding for local authorities that provide adult social care "so it properly reflects the demands of our ageing population".

The Government said these changes come alongside previously announced plans to reform children's social care and the Special Educational Needs and Disabilities (SEND) system.

The Dedicated Schools Grant Statutory Override, which helps councils manage SEND costs, will stay in place until the end of 2027/28 in order to assist the reforms, it announced.

In addition, the Government said it will introduce a bespoke formula to recognise Home to School transport costs.

The move comes after the Public Accounts Committee issued a report on local government funding on Wednesday that raised fears that without the statutory override, "many local authorities are at risk of effectively going bankrupt".

Elsewhere, the consultation revealed plans to reset the business rates retention system to incentivise local authorities "to help their local economies grow by better matching the system to local need".  

In a written ministerial statement on the reforms, Local Government Minister Jim McMahon said: "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"As part of this, the formulae used to assess local authorities' current needs, which are a decade out of date, will be updated to target money where it needs to go and ensure those places that have been overlooked get their fair share."

On the fairer funding review, McMahon said the Government plans to move around "£2 billion of funding to the places and communities that need it most", and modernise council tax administration.

He added: "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."

McMahon added that the proposed changes to council tax would aim to end "unacceptable, aggressive collection practices" in relation to council tax avoidance.

He said the current approach has, in some cases, "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".

The consultation on the Fair Funding Review 2.0 will be open for eight weeks, closing on 15 August 2025.

A separate consultation has been launched on council tax modernisation, which is open for 12 weeks and closes on 12 September.

Responding to the announcement of funding reform, Cllr Pete Marland, chair of the Local Government Association's Economy and Resources Board, said: “Different councils will have contrasting views on these proposals. Individual councils will need to know the implications and a transitional mechanism is crucial to avoid putting services at risk.

“Clarity on councils being able to keep high needs deficits off their main balance sheets is helpful. We continue to urge government to write off these deficits as part of its comprehensive SEND reform plan.”

On the plans for council tax collection, Cllr Marland added: "All councils already allow residents to pay council tax over a 12-month period, but we look forward to working with government on an approach that enables councils to invest in council tax collection practices that effectively balance the collection of vital revenues with measures that help those struggling to pay.”

Welcoming the announcements, Cllr Tim Oliver, chair of the County Councils Network, said: “We now need to ensure that the government’s commitment to support councils to manage their SEND deficits rings true.

“Despite the extension of the statutory override, many councils still face a number of issues, including rising debt outstripping reserves, mounting interest payments, and lost investment income. For some, this could mean reducing services elsewhere or running into extreme financial difficulty.”

He said it was critical the government sets out a solution this year, which should include writing off deficits and compensating councils “who went through the pain” of ‘Safety Valve’ agreements.

However, Cllr Jeremy Newmark, finance spokesperson for the District Councils' Network, warned that the funding reforms "unfairly penalise the users of district council services, which offer a lifeline to many people and enrich the lives of many more".

He added: "Services including housing, parks, leisure and wellbeing, street cleaning and town centre regeneration will inevitably be impacted by the triple whammy of scrapping the New Homes Bonus, resetting business rates and the new funding formula.

“These changes redistribute money away from the vital preventative services that districts provide. These include leisure centres, which keep people healthy and out of hospital; home adaptations for older people and people with disabilities, which reduce demand for social care; and early intervention to support people at risk of homelessness."

Cllr Newmark added: “The old system was unfair and did not work properly for most councils. The principle of targeting deprivation is welcome. However, these proposals will have problematic knock-on effects.

“In the Spending Review, the Government rightly emphasised the importance of long-term investment. So it’s disappointing that this principle has not been applied to local government funding. District council services have been proven to reduce costs for the NHS, adult social care and the wider public purse.”

Adam Carey