Blog 2nd February 2025

Local Government Finance Settlement 2025/26

Local authorities in England are in the process of setting their budgets for 2025/26 in the light of the provisional local government finance settlement that was announced on 18th December 2024. At the same time the government launched a consultation on proposed reforms to the funding of local government from 2026/27 onwards. The final settlement is expected in early February. This blog looks at the highlights and provides some comments.

In announcing the provisional settlement, the government pointed to four headlines:

• The provisional Local Government Finance Settlement will provide £69billion overall for councils across England.
• Councils in England will see on average a 6.0% increase in Core Spending Power with £2billion additional grant funding for 2025/26, including a £700million top up. This represents a 3.5% real terms increase.
• £600million through a new Recovery Grant to help support places most in need.
• As part of this, £3.7billion will be made available to social care authorities to strengthen community care, invest in prevention and give children the best start in life.

Grants (excluding £515million to fund National Insurance and a £13million uplift to the Children’s Social Care Prevention Grant) will increase from £28,829million to £30,572million, an increase of 6.0%. Council tax receipts are also estimated to increase by 6.0% from £36,154million to £38,312million due to an increase in the council tax base and the assumption that councils will increase council tax rates by the maximum allowable (generally by 5%).

Leeds Civic Hall. Leeds City Council has received a relatively generous settlement.

However, the average increase of 6.0% in spending power masks significant differences between authorities as the government has changed some of the formulae mainly to benefit urban authorities and those with high levels of deprivation. Those authorities with the highest increases in spending power are Liverpool (9.5%), Manchester (9.5%), Salford (9.3%), Blackpool (9.1%), Knowsley (9.1%), Leeds (9.1%) and Newham (9.1%). In contrast, 133 authorities, all of them shire districts, will see no increase in spending power at all, representing a real terms reduction after inflation is considered. Several fire authorities have relatively low increases in spending power with the Cumbria service having the lowest at 1%. The Greater London Authority has a relatively low increase at 2.5% (matching the expected level of inflation), and the unitary authorities with the lowest increase at 3.1% are the City of London, the Isles of Scilly and Shropshire.

The Eden Valley in Cumbria. Rural areas have had a less generous settlement than urban areas. Cumbria Fire has the lowest increase in spending power of any fire authority.

Grants are summarised as follows:

                                                                                    2024/25           2025/26            Variation

                                                                                    £million            £million            £million

Settlement Funding Assessment                                      16,563             16,841                278 +

Social Care Grant                                                             5,044               5,924                880 +

Business Rates Compensation                                            2,581              2,696                115 +

Better Care & Adult Social Care Discharge Grant                  2,640              2,640                    0

Market Sustainability & Improvement                                 1,050               1,050                   0

Recovery Grant                                                                       0                  600                600 +

New Homes Bonus                                                               291                  290                   1 –

Children’s Social Care Prevention                                              0                  250                250 +

Domestic Abuse Safe Accommodation                                    130                  160                130 +

Funding Floor                                                                          0                  122                122 +

Grants Rolled In                                                                     64                      0                64 -

Services Grant                                                                       87                      0                87 -

Rural Services Delivery Grant                                                110                      0                110 –

Funding Guarantee                                                               269                      0                269 -

Total                                                                               28,829             30,572              1,743 +

The Settlement Funding Assessment includes Revenue Support Grant and Business Rates. Business Rates are set by central government and distributed between authorities based partly on where they are collected and partly on an assessment of need to spend.

The main increases in funding are through the increase in the Social Care Grant and the introduction of the Recovery Grant.  The government is also redistributing grants, generally to favour urban and deprived areas.

The Social Care Grant is a grant provided to upper tier authorities for social care expenditure, on both adult and children’s social care. Grants were increased in total by 17%, with increases for individual authorities being between 14% and 20%. Wandsworth and Westminster had the largest increases at 20% while the lowest increase was in Oxfordshire.

The government proposes to introduce a new Recovery Grant, worth £600million. This will be distributed to places with greater need and demand for services (with deprivation being used as a proxy for this), and which are least able to fund their own services locally. The Recovery Grant allocates funding to local authorities with a greater share of ‘need’ than share of ‘resource’ where:

• ‘Need’ is based on deprivation and population.
• ‘Resource’ is based on council tax base.

Recovery Grant averages £23 per dwelling across England, but there are significant variations between authorities. Of the 349 authorities in England, only 156 will receive the grant. Those with the largest allocations per dwelling are Knowsley (£95), Sandwell (£86), Birmingham (£85), Wolverhampton (£84), Newham (£83) and Blackburn with Darwen (£83).

The government has also published proposals for a more fundamental reform of local government finance from 2026/27 onwards on which it is currently out for consultation.

The government considers that the link between funding for local authorities and the need for services has broken down, contributing to worse outcomes and higher Council Tax bills in more deprived places; that the current system for funding local authorities represents bad value for taxpayers, and without action this will get worse. It is difficult to disagree with this.

The government’s principal objective is to develop a new distribution methodology, based on an updated assessment of need and resources, to allocate funding more efficiently to local authorities through the Local Government Finance Settlement. They intend to do this by updating the existing Settlement Funding Assessment. They consider that mending the foundations of local government funding will enable local authorities to provide vital front-line services and be a key partner to mission-led government. This new distribution methodology will be used to allocate grant funding and retained business rates income. It will:

• Measure differences between local authorities in demand for services, using an updated ‘Relative Needs Formulae’, considering drivers of demand including population and deprivation.
• Measure differences in the cost of providing services, using ‘Area Cost Adjustments’.
• Adjust for the ability to raise Council Tax locally.

AWICS offers management consultancy support and training to local authorities. For more information, please click here.

AWICS has already assisted the Local Government Association in modelling for the Fair Funding review. For more information, please click here.

Further information about the Provisional Local Government Finance Settlement for 2025/26 is available on the government's website. To view it, please click here.

The Local Government Association has an analysis of the provisional settlement on their websute. To view it, please click here.