Government is implementing major reforms to how Local Government will be funded and to how Local Government funding is allocated.

Government believes this to be an “an overhaul of the outdated and complex council system” and believes the reforms will bring fairer funding, more stability and improve lives of people across the country.

The Local Government Finance Settlement

In the Government’s response to the Fair Funding Review 2.0, it committed to a fairer, evidenced-based system that targets funding towards areas with high deprivation and need. The Government wants to deliver this through the Local Government Finance Settlement. 

The 2025 Spending Review announced over £5 billion additional funding for local government services over this 3-year period, including £3.4 billion of additional funding allocated through the Local Government Finance Settlement.

Government ran a consultation from 17 December 2025 to 14 January 2026 on its proposal for the provisional Local Government Finance Settlement for the financial year of 2026-2027.

The 2026-2027 Settlement will be the first multi-year settlement in a decade, running from 2026-27 to 2028-29. Provisional allocations for all 3 years of the settlement were set out in the consultation. Government is consulting on the settlement in 2026-2027 with final allocations for 2027-28 and 2028-29 to be confirmed in their respective years.

The proposed reforms

The consultation sets out the Government’s proposal for reform, which includes:

• Resetting the business rates retention system and changing the basis on which “tariff” and “top up” payments are calculated as part of the business rates retention system. Government is also proposing that all currently retained business rates to remain with local government across the reset and business rates be distributed according to new “relative need shares”.
• Introducing the new Revenue Support Grant which will consolidate 18 funding streams, the value of these funding streams are said to be £11.66billion and will be delivered through the Local Government Finance Settlement.
• For Council Tax, a core referendum threshold of up to 3% has been proposed. Local authorities with social care responsibilities will also be able to set an additional adult social care precept of up to 2% per year without a referendum.

Government plans to assess how much councils can raise themselves via council tax, based on modelled revenues if their tax rate was equal to the average tax rate across all councils.

Allocation of funds

Government’s consultation included their Fair Funding Allocation Calculator and Core Spending Power Table setting out the allocation of funding to individual local authorities and the impact of the funding allocation on their core spending power when compared from 2024-25 to 2028-29.

Among the most deprived areas, we see an increase in the allocations of funding in  Middlesbrough, Birmingham, Coventry, Bradford and Manchester, as well as outer London boroughs such as Haringey and Enfield.

Manchester is said to see a 46.8% change in core spending power from 2024-25 to 2028-29 with Coventry and Bradford is said to have a change in their core spending power of 46.5% and 46.9% respectively.

Comparatively, some urban councils are expected to a negative change in their core spending power from 2024-25 to 2028-29. Cannock Chase is said to see a change of -2.4% and Tonbridge and Malling at -15%.

For all local authorities where the difference between their position before the funding allocation and after is 15% or less, Government has offered 100% income protection and has said that it will ensure 100% of their 2025/26 income is protected.

Currently, six Councils (City of London, Hammersmith and Fulham, Kensington and Chelsea, Wandsworth, Westminster, and Windsor and Maidenhead) are facing reductions in funding and have among the lowest council tax rates in the country. Each has been granted pre-authorisation to exceed the usual limits for two years. To ease the impact of the re-allocation, these six Councils are set to be allowed to raise their council tax above the current 4.99% cap from April.

Summary

Overall, commentators have welcomed the proposed reforms from Government. However, some areas are still set to ‘lose out’ as a result of a reformed system.

The County Councils Network has said that “At least 90% of CCN member councils’ much-vaunted increase in total ‘core spending power’ will come from presumed council tax rises of 5%, we estimate.”

By the end of the multi-year settlement, Councils are said to have seen an increase of over 23% in spending power when compared to 2024/25. Government believes that Councils are set to become more financially stable as the allocation of funds will become fairer.

We will continue to report on developments as the results of the consultation are published.

How Capsticks Can Help

We will cover updates in our monthly Local Government newsletter.

Please don’t hesitate to contact our experts if you have any questions or particular concerns on the topics raised in this article.

To discuss issues that may affect your organisation, please get in touch with Tiffany Cloynes, Head of Local Government and Megan Tam, Senior Associate at Capsticks.