On 20 June 2025 the government published a consultation titled The Fair Funding Review 2.0. This consultation proposed significant changes to the grant funding system for English local government, which aim to simplify how central funding is distributed to local authorities and ensure “funding is truly based on need”. These are expected to take effect on 1 April 2026, for the 2026/27 financial year.

As a result, central government funding for some authorities will increase, and for others it will decrease.

More detail will be available in a forthcoming Library research briefing titled Explaining the Fair Funding Review 2.0.

How does local government funding work now?

Local government in England is funded through a combination of:

  • council tax, levied on households and retained by each local authority
  • business rates, levied on businesses – part of the revenue from business rates goes to fund central government grants and part is retained by local authorities
  • grants from central government

In 2025/26, the amount available to local authorities in central government grants and business rates revenue was £31 billion, which is 45% of authorities’ core spending power.

Some of these grants (such as the Revenue Support Grant) are general, meaning an authority could spend them on anything. Others are ring-fenced, meaning an authority could only spend them on certain things (for example, social care). The government uses specific criteria for each grant to decide how much of the grant to give to each local authority.

What does the Fair Funding Review do?

The government plans to introduce a new system for allocating grant funding to local authorities. This will be used to allocate the Revenue Support Grant, the largest general (non-ring-fenced) grant. This grant will swallow up a number of smaller grants: exactly which ones is yet to be confirmed. Those grants (including the Revenue Support Grant) amounted to around £10 billion in 2025/26.

Under the new system, this funding will be distributed to authorities according to:

  • An assessment of relative need, divided into nine relative needs formulas (RNFs) and based on numerous social indicators.
  • An area costs adjustment (ACA), to take into account variations around the UK in the costs of providing services.
  • A resource assessment, taking account of each council’s capacity to raise council tax.

The system will also change how business rates revenue is redistributed between councils. Since 2013/14, if the year’s business rates revenue in a local area was higher than it was in 2012/13, local councils have retained a proportion of this growth in revenue . That means that some councils have been able to increase their funding levels through growth in business rates. That effect will be wiped out when the new system is introduced. In forthcoming years, councils will then be able once again to retain a proportion of the growth in business rates, with the 2026/27 funding distribution as the starting point.

The new allocations of funding, for grants and business rates, will cover three years (2026 to 2029).

How much money will each council get?

The Fair Funding Review will determine how central government grants and business rates revenues are distributed between authorities. It doesn’t itself provide any new money for them,

The government will provide funding figures for each authority at the 2026/27 provisional Local Government Finance Settlement (the annual allocation of funding to local authorities, approved by the House of Commons). This is likely to appear in November or December 2025.

In the meantime, it isn’t possible to reliably estimate how much money each council will receive in 2026/27. This is because many details are unconfirmed:

  • The government is planning to introduce the changes gradually, so the outcomes of the new formulae will only apply fully to each council by 2028/29.
  • The government is consulting on whether a ‘funding floor’ should be used, to prevent any council from losing out from the changes.
  • Other reforms to business rates will change the amount of business rates revenue that each council receives (see the Library briefing on the Non-Domestic Rating (Multipliers and Private Schools) Bill 2024-25)

What other reforms is the government planning?

The government’s consultation mentions a number of other proposed changes to local government funding. None of these in themselves will provide any additional funding for local authorities.

The government plans to merge a number of existing grants outside the general funding settlement: negotiations are still under way on exactly which ones. This will mean that councils will receive fewer separate grants and won’t have to spend as much time and money on reporting to government departments.

To that end, the consultation states that four new ‘consolidated grants’ will be used from 2026/27. Departments are still negotiating on this point, so more consolidated grants could emerge. These grants will all be distributed according to existing funding formulae: they will not be subject to the new formula system. And consolidating grants will not itself provide any new money for authorities.

The government published a separate consultation on council tax administrative reform in June 2025. This consultation does not propose any major changes to council tax. It plans to alter the system of enforcement (how councils deal with unpaid council tax bills) and asks for views on whether council tax discounts and exemptions should be changed. There are no plans to raise more money from council tax, or to revalue council tax bands.

Recent reports have discussed strains on council finances resulting from increasing costs of providing education for children with special educational needs and disabilities (SEND). This has caused significant deficits and cashflow issues for certain councils. The consultation says that the government will set out further proposals to address this at the 2026/27 Local Government Finance Settlement.

About the author: Mark Sandford is a researcher in the Commons Library.

Photo by: www.geograph.org.uk

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