Fairer funding for councils across the country in major reform
Source: gov.uk (2025-06-19)

An overhaul of the outdated and complex council system will bring fairer funding, more stability and improve lives of people across the country

An overhaul of the outdated and complex council system will bring fairer funding, more stability and improve lives of people across the country

New place-based, focussed formulas to target money to places most in need, replacing decade old data and outdated funding system

Streamlined funding and multi-year settlements introduced in drive for council efficiency and improved public services as part of the Plan for Change

The local government funding system will be reformed to get councils back on stable footing, improve the lives for people across the country and deliver essential funding for better public services, delivering on the Plan for Change.

Working hand-in-hand with the sector, proposals will create a fairer system that reflects areas’ changing needs, differing delivery costs and the level of demand on front-line services that people rely on such as social care.

For too long, many residents have seen council tax hikes despite declining local services. This will be tackled by overhauling the decade old, outdated funding methodology currently used to fund councils, so allocations are made based on the latest and best available data and recognise the areas where demand for council services is greatest. As a result of these changes, left behind places will on balance see larger increases in available income.

It will also scrap existing competitive bidding processes councils often have to go through for small pots of money, simplifying the 300 grants that already exist to slash time waste in councils and Whitehall and prioritise value for taxpayer cash. This could help cut the almost 90,000 document pages historically required as part of the competitive processes. This would be almost the equivalent of the drive from Birmingham to Wolverhampton, if laid end to end.

Targeting money to places in need, prioritising prevention and reforming public services as part of the government’s mission-driven agenda to deliver for working people, tackle poverty and drive growth across the country as part of a decade of renewal. These changes will deliver the Fair Funding Review (https://www.gov.uk/government/consultations/fair-funding-review-a-review-of-relative-needs-and-resources) launched by the previous government in 2017 but never actioned.

Minister for Local Government and English Devolution, Jim McMahon OBE said:

We inherited a local government sector on its knees—councils pushed to the financial brink, facing rising demand, and working people not receiving the quality local services they rightly deserve.

There’s broad agreement across council leaders, experts, and parliamentarians that the current funding model is broken and unfair. This government is stepping up to deliver the fairer system promised in the 2017 Fair Funding Review but never delivered.

These reforms are urgently needed to put councils on a stable footing and ensure better services for residents — especially working people — right across the country. It’s a key part of our Plan for Change to deliver the outcomes people deserve.

It follows last week’s additional funding announced in the Spending Review and the 2025-26 Local Government Finance Settlement that saw £69 billion allocated for local authorities.

The eight-week consultation launched today sets out how the government will make funding allocations fairer for councils of all sizes and across all parts of England.

Rural areas: proposals to recognise the remoteness of areas and account for the additional costs in delivering services in rural places;

Urban areas: making sure that deprivation is properly recognised in the ‘assessment of need’ of councils, so that the vital services that support the poorest in communities are properly funded;

Social care: 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. We are also reforming children’s social care and Special Educational Needs and Disabilities (SEND), including ensuring councils are properly funded to help support and protect the most vulnerable children. While these reforms are underway, the Dedicated Schools Grant Statutory Override, which helps councils manage SEND costs, will stay in place until the end of 2027/28 and in addition we will introduce a bespoke formula to recognise Home to School transport costs;

Resetting the business rates retention system: so that it incentivises local authorities to help their local economies grow by better matching the system to local need; and

Consolidating billions in grant funds: so that councils no longer waste time or money bidding for small pots of funding, replacing it with a streamlined grant system that promotes prevention and public service reform, and reflects key missions in the Plan for Change. The Department estimates councils shelled out almost £70million in administrative costs and consultancy fees on bidding for the Levelling Up Fund and other bidding schemes.

The first multi-year settlement in a decade will also be brought forward in 2026-27 to finally provide council leaders with security and certainty over their finances, ending short-termism to deliver meaningful change to their communities.

These reforms, together with the additional funding announced through the spending review will ensure the vast majority of upper-tier councils will see real-terms increases in available funding over the multi-year settlement.

Further information

Minister McMahon’s Written Ministerial Statement can be read here. (https://questions-statements.parliament.uk/written-statements/detail/2025-06-20/hcws724)

The consultation can be viewed on Gov.uk here (https://www.gov.uk/government/consultations/the-fair-funding-review-20) and will be open for 8 weeks

The response to the earlier consultation can be viewed on Gov.uk here (https://www.gov.uk/government/consultations/local-authority-funding-reform-objectives-and-principles).

The government is proposing a transitional approach to the new funding system over a three year period, to enable local authorities to plan for changes.

No allocations for local authorities have been announced or confirmed yet. This will be announced in the provisional Local Government Finance Settlement 2026-27 later this year – the same approach as with previous years.

Building on action already taken in the 2025-26 Local Government Finance Settlement, today’s announcement to streamline the grant system, local leaders will have more flexibility to spend on their voters’ priorities, drive efficiency in councils and deliver better value for taxpayer money.

Accountability and transparency over public spending will be bolstered through a greater focus on outcomes that reflect voters’ priorities.

Dr Ryan Swift, research fellow at IPPR North said:

“The last government implemented budget cuts that hammered local councils, especially in the most deprived areas, meaning fewer and poorer services for local people.

“But today things are looking up. Upping core funding, introducing multi-year funding settlements and ending competitive bidding processes will provide more stability so councils can plan for the future and improve.

“Today’s announcement is a step along the road to repairing council finances. Recognising demands on local services from factors like demographics and deprivation are crucial so that councils can deliver the services that people expect and deserve.”

Cllr Sir Stephen Houghton, Chair of the Special Interest Group of Municipal Authorities (SIGOMA) said:

“The significant reforms proposed by the government will deliver a fairer and more sustainable system and are a major and positive step forward.

“A decade of disproportionate cuts, outdated formulas and short-term settlements have left our members with shrinking resources, struggling to meet rising demand. It is therefore very welcome that there will now be a focus on delivering a funding system that supports the most deprived areas. This will build on the important work of the Recovery Grant.

“Simplifying the grant system and delivering a long-overdue multi-year settlement will bring about much-needed stability and certainty for councils. The government’s close engagement with the sector is testament to the reset in the relationship with local government, and we look forward to responding to the consultation and continuing to engage with the department.”

Cllr John Merry, Chair of Key Cities, said:

“Councils are central to national renewal. They must be valued, properly funded, and adequately resourced to deliver essential services - from social care to affordable housing - which are under increasing strain. Key Cities’ inaugural survey of council leaders found that many are already turning to financial reserves and service redesigns, with asset sales, salary reductions and redundancies under active consideration.

“As the largest and most diverse urban network outside the capital, with 24 members, we have long championed the need for a funding reset: one that empowers local authorities and channels resources to the communities that need them most, driving inclusive national growth. “What’s needed now is long-term funding certainty, replacing piecemeal interventions and enabling councils to focus on meeting local needs. Key Cities welcomes the launch of the Government’s second consultation on local government funding reform. We remain committed to working with the Government to shape a brighter future for our communities.”