Council Tax: A Broken System Entrenched by the Local Government Finance Act

Council Tax: A Failing System Entrenched by the Local Government Finance Act

Council tax, the cornerstone of local government funding in the UK, was introduced through the Local Government Finance Act 1992 as a replacement for the widely despised Poll Tax. Initially hailed as a fairer alternative, it has evolved into a deeply flawed system that entrenches inequality, disproportionately burdens lower-income households, and fails to provide councils with the resources necessary to deliver essential services. Outdated property valuations and entrenched resistance to reform have created a structure that exacerbates economic disparity and stifles progress.

The core failure of council tax lies in its reliance on 1991 property valuations, frozen in time despite radical shifts in the housing market. Over the past three decades, property prices in London have surged by over 500%, while increases in regions like the North East have been far more modest at around 80%. This has allowed affluent homeowners in high-growth areas to enjoy disproportionately low tax rates relative to their property values, while residents in less prosperous regions shoulder a heavier burden. A household in a Band A property in the North East pays a far greater percentage of its property value in tax than a Band H property owner in Westminster, where council tax is negligible compared to the home’s worth.

The regressive nature of council tax is starkly evident in income comparisons. The lowest-income households pay more than 5% of their earnings toward council tax, while the wealthiest pay less than 2%. This discrepancy not only deepens financial hardship for those already struggling but also amplifies regional inequalities, as councils in deprived areas are forced to impose higher rates to fund even the most basic services.

Despite these high rates, councils often fail to deliver adequate public services. Much of the revenue collected is consumed by administrative costs, leaving critical sectors like social care and housing perpetually underfunded. In 2023, over 30% of council tax arrears involved households already in financial distress, with many subjected to aggressive debt collection practices, including bailiff action. Such measures only exacerbate the cycle of poverty.

Adding to these inefficiencies is the systemic issue of land banking, where developers hoard land, anticipating future increases in value rather than building affordable housing. Weak enforcement of planning regulations has allowed over 1 million homes with planning permissions to remain unbuilt as of 2022. Speculative practices encouraged by hope value—the speculative premium attached to land based on potential future development—drive up prices, further constraining the housing supply. The current tax system, including council tax and stamp duty, incentivises these behaviors while discouraging the timely development of affordable homes.

Efforts to reform the system have repeatedly failed due to political inertia and opposition from vested interests. Wealthy homeowners benefiting from the outdated valuations have resisted change, while politicians, wary of alienating affluent voters, have avoided addressing these inequities. Councils, too, are trapped in a cycle of reliance on increasing tax rates to fill budgetary gaps, a strategy that is both unsustainable and damaging. By 2024-25, 95% of councils had raised tax rates to their legal maximum, yet this temporary solution leaves them with no room to maneuver in future crises.

One of the more insidious aspects of council tax is its impact on housing improvements. Homeowners who add extensions or make modifications—often for accessibility reasons—frequently find themselves pushed into higher tax bands, penalising them for addressing genuine needs. For example, a family installing a ground-floor bedroom for a disabled relative may face higher tax bills, discouraging such essential adaptations. This regressive approach punishes those trying to improve their living conditions, further entrenching inequities.

Building more homes alone will not solve the UK’s housing and funding crisis. The structural flaws of the tax system undermine any benefits from increased housing stock, perpetuating inefficiencies and disparities. Reforming the tax model is the only viable path forward. The Proportional Property Tax (PPT), which replaces council tax with a flat rate based on up-to-date property values, offers a promising solution. Under PPT, a household in a £200,000 property would pay £960 annually—a rate aligned with real wealth, reducing disparities and providing councils with a stable revenue stream. Regular revaluations would ensure the system adapts to market realities, preventing the distortions seen today.

Another viable alternative is the Land Value Tax (LVT), which focuses on taxing the value of land itself rather than properties. By discouraging land banking and incentivising efficient use, LVT could unlock much-needed development, addressing housing shortages while generating equitable revenue.

Reform is no longer just desirable; it is essential. The current council tax system not only entrenches inequality and inefficiency but also undermines public trust in local governance. Successive governments have failed to act, prioritising votes over meaningful change. If political parties continue to neglect this broken system, they will remain complicit in perpetuating a crisis that deepens with each passing year. It is time for a bold reimagining of local government financing—one that prioritises fairness, efficiency, and the needs of all citizens. Only then can the UK address its housing and funding challenges with the urgency and equity they demand.