Council tax rise: why payments could increase by 5% over next three years, and how this will impact households

Researchers said council tax could potentially rise by up to 5% every year up to 2024/25 due to extra cost pressures and demand

Council tax may need to rise by up to 5% a year for the next three years in order to keep services running and pay for social care reforms, a think tank has warned.

But what do these rises mean and how will they affect people?

Sign up to our Money Savers newsletter

The i newsletter cut through the noise

Here’s what you need to know.

How much could council tax rise by?

The Institute for Fiscal Studies (IFS) said that under current government spending plans, a rise of at least 3.6% on council tax bills will be needed per year in order for town halls to keep services running at the levels seen before the Covid pandemic.

However, the researchers said this would likely be a minimum requirement, with tax potentially rising by up to 5% every year up to 2024/25 due to extra cost pressures and demand.

The IFS also said that council tax rises alone would not be enough to deal with the pressure, with a funding gap of £2.7 billion in 2022/23 - even with a 4% increase on bills in April 2022.

The think tank said social care aims announced by the Government last month are currently underfunded and would cost £5 billion a year in the long term, which is almost three times the additional funding allocated over the next three years.

What impact could council tax rises have?

The warning comes in a pre-released chapter of the IFS green budget. The rest of the budget will be launched closer to the planned Budget and spending review later this year.

Kate Ogden, a research economist at IFS and an author of the chapter, said: “The Government has stepped up with billions in additional funding for councils to support them through the last 18 months, it is likely to have to find billions more for councils over the next couple of years if they are to avoid cutting back on services, even if they increase council tax by 4% a year or more.

“The coming financial year is likely to be especially tough, with the likelihood of at least some ongoing Covid-19-related pressures, and a particularly tight overall spending envelope pencilled in.

“At the same time, government needs urgently to deal with a local government funding system which is becoming hopelessly out of date, being based on population levels and characteristics in 2013.

“This results in manifest unfairnesses in the distribution of resources between councils.”

A Government spokesperson said: “The Government has allocated more than £12 billion directly to councils since the start of the pandemic – with more than £6 billion available to spend as they see fit – recognising that councils are best placed to deal with local issues.

“We have also taken historic action to fix the social care crisis – the Health and Social Care Levy will raise £12 billion a year to fund the NHS and social care.

“The Spending Review will continue to focus on supporting jobs and delivering the public’s key priorities.”