Office of the Deputy Prime Minister - Local Government Finance Statistics England No.16

Office of the Deputy Prime Minister

Local Government Finance Statistics England No.16

CHAPTER 2

How is the money found?

2.0.1 This chapter describes the main sources of income for local government in England. It is divided into the following sections:

2.0.2 Further information can be found in Annex B - Council tax exemptions.

2.1 Summary of sources of local government income

2.1.1 The main sources of income for local government in England are:

  • Council tax;
  • Redistributed business rates;
  • Other government grants;
  • Borrowing and investments;
  • Interest receipts;
  • Capital receipts;
  • Sales, fees and charges; and
  • Council rents.
  • Total local government income increased steadily from £81.4 billion in 1998-99 to £119.6 billion in 2003-04.
  • The amount of income received in 2003-04 in the form of government grants was 62%.

'Table 2.1a: Summary of local authority income 1998-99 to 2003-04

2.1.2 The remainder of this chapter provides more information on council tax, business rates, grants and sales, fees and charges. Further information on other sources of income can be found in the following chapters:

  • Council rents and other Housing Revenue Account income - Chapter 3
  • Capital grants and capital receipts - Chapter 4
  • Borrowing and investments - Chapter 5

2.1.3 In addition, local authority pension funds had a total income of approximately £7.6 billion in 2003-04. However, this falls outside the usual definition of local authority income. Further information is provided in Chapter 6.

2.2 Council tax

2.2.1 Council tax was introduced on 1 April 1993. It replaced the community charge (poll tax) system which, in turn, replaced domestic rates on 1 April 1990.

2.2.2 Council tax is the main source of locally-raised income for local authorities. It is, therefore, the main source of funding used for meeting the shortfall between an amount a local authority wishes to spend, and the amount it receives from other sources, such as government grants.

2.2.3 The impact on council taxes of increasing budgets varies widely between local authorities. This effect, known as gearing, can be thought of as a balance of funding between budget met through council taxes and budget met through other sources.

2.2.4 Gearing works such that an authority meeting a large proportion of budget through council tax will require a smaller increase in council tax for a given increase in budget. For example, an authority that meets 25% of its budget through council tax has a gearing ratio of 4.0. Therefore, a 1% increase in budget would lead to a 4% increase in council tax. In contrast, an authority that meets 75% of its budget through council tax has a gearing of 11/3. For this authority, a 1% increase in budget would only lead to a 11/3% increase in council tax.

2.2.5 Table 2.2a gives national totals for the council tax requirement budgeted for each year since 1998-99. It shows how the amounts were derived when setting budgets, and how they changed during the course of each year, for example by council tax becoming due from new properties that had not been included in the budget calculations. The table also includes figures for Council Tax Benefit, which is a means-assessed social security benefit.

Table 2.2a: Council tax budgets and outturn

2.2.6 The amount of council tax payable on a property depends in part on the valuation band to which it is allocated. There are currently eight bands in England ranging from Band A for dwellings valued at less than £40,000 on 1 April 1991 to Band H for dwellings valued at more than £320,000 on that date.

  • Nationally, 25% of properties are in Band A, and only 9% are in the top three bands.
  • The pattern varies widely across regions; the percentage of properties in Band A ranges from 58% in the North East to 3% in London.

Table 2.2c: Number of dwellings on valuation list as at 31 March 2005 (by region)

2.2.7 Within an authority, the council tax for each valuation band is a fixed ratio to that for Band D. For example, a Band A dwelling will pay 6/9 the Band D amount, and a Band H dwelling will pay twice the Band D amount. The ratios for all bands to Band D are shown in Table 2.2c.

2.2.8 Band D is used as the basis for calculating the tax base (the number of Band D equivalent properties) and for year-on-year comparisons of tax levels set. However, as only a minority of properties in each local authority are in Band D, the average Band D council tax does not enable direct comparison to be made of the average amounts of council tax payable by people in different areas.

2.2.9 In contrast, average council tax per dwelling reflects the wide variation between authorities in the distribution of properties across bands. It is therefore a helpful measure to use when comparing the amounts payable in different areas. Variations between figures on this basis are due to a combination of local authority tax-setting decisions and the distribution of properties across bands within each authority's area.

2.2.10 The Government has the power to cap the budgets and hence council taxes of authorities whose budgets it regards as excessive. In addition the Government can also set notional budgets for authorities, that are lower than the authorities' actual budgets, and which will form the basis for making comparisons with budgets in the following year or years for capping purposes.

  • In 2003-04, the last year in which capping powers were not exercised, the average council tax increase in England was 12.9%.
  • In 2004-05, the budgets of six authorities were capped in-year and notional budgets were set for eight authorities.
  • The average council tax increase in England in 2004-05 was 5.9%.
  • In 2005-06, the budgets of eight authorities were capped in-year and a notional budget was set for one authority.
  • The average council tax increase in England in 2005-06 was 4.1%.
  • The Government judged authorities' 2005-06 budget requirements to be excessive, if they increased their budget requirement between 2004-05 and 2005-06 by more than 6% and council tax by more than 5.5%.

2.2.11 Table 2.2e shows trends in average council taxes since 1993-94, expressed in two ways: the average Band D figure (including amounts funded by Council Tax Benefit); and the average council tax per dwelling. The table also gives figures for increases in the Retail Price Index (RPI) and average UK earnings.

2.2.12 The average council tax per dwelling is lower than the average Band D council tax. This is partly because most dwellings are in bands lower than Band D; and partly because properties that are subject to a discount (for example for a single person, or because it is a second home) are counted as a whole property in the calculation of average council tax per dwelling, but as only part of a property in the calculation of the average Band D council tax.

  • Band D council taxes, including amounts funded by benefit, increased by about 114% in cash terms or 57% in real terms between 1993-94 and 2005-06.

Table 2.2e: Average council taxes and increase in Retail Prices Index 1993-94 to 2005-06

  • The difference between Band D council tax and the average council tax per dwelling is greater in the northern regions of the country. This is mainly due to lower average property prices in the North.
  • The average Band D council tax in rural areas has been higher than in urban areas since 2001-02, whilst the opposite was true before then.

Table 2.2f: Average council taxes by region and class 1998-99 to 2005-06

2.2.13 Whilst high Band D council tax is concentrated in the North and the Midlands (see Map 2.2g), high average council tax per dwelling (that is the average council tax paid by a household) is concentrated in the South East of England (see Map 2.2h).

Map 2.2g: Band D area council tax 2005-06

Map 2.2h: Average council tax per dwelling 2005-06

  • For 74% of the 354 billing authorities, the Band D area council tax for 2005-06 is between £1,150 and £1,300.

  • For 86% of the 354 billing authorities, the percentage increase in Band D area council taxes between 2004-05 and 2005-06 was between 3.1% and 5% and for 8% of the 354 billing authorities, the percentage increase was less than 3%.

2.2.14 Not every property on the valuation list is liable to pay a full council tax, which is partly based on the property and partly based on the occupants of the property. Some properties are exempt, for example due to being empty for less than six months, or subject to a discount. The full council tax bill assumes that there are two adults living in a dwelling. If only one adult lives in a dwelling (as their main home), the council tax bill is reduced by a quarter (25%).

2.2.15 Before 1 April 2004, the council tax bill for a dwelling which was no-one's main home was reduced by a half (50%) in all local authority areas. However, since 1 April 2004, the Local Government Act 2003 has given councils in England the choice to apply council tax discounts of between 10% and 50% for second homes, to reduce or end discounts for long term empty property, and to grant discretionary discounts and exemptions.

  • For 2005-06, 209 out of the 354 billing authorities reduced the discount for second homes in their area;
  • 158 billing authorities removed or reduced the discount for long-term empty homes in their area;
  • 26 billing authorities reported they had used the power to grant discretionary discounts or exemptions between 1 April and 1 November 2004.

2.2.16 Certain people are not counted when looking at the number of adults resident in a dwelling, such as students and severely mentally impaired people. More detailed information on council tax exemptions is set out in Table B1 and Table B2 of Annex B. Council tax exemptions are taken into account by billing authorities when they calculate their taxbase (the number of Band D equivalent properties in their area).
  • Of the 21.1 million chargeable dwellings in England as at 11 October 2004, 0.5 million (2%) were entitled to a 50% discount and 7.5 million (35%) were entitled to a 25% discount.

Table 2.2k: Number of chargeable dwellings (a)

  • Average in year council tax collection rates have been slowly increasing, and reached 96.6% nationally in 2004-05.
  • The average in year council tax collection rate in Inner London Boroughs has risen by 16.9 percentage points in the period 1993-94 to 2004-05.

Table 2.2l: Collection rates (a): Council tax 1993-94 to 2004-05

2.2.17 The collection of council taxes continues once the financial year to which they relate has ended. This means that the final collection rate achieved is somewhere between the figures shown and 100%.

  • It is estimated that £12 million of community charges and £1.7 billion of council taxes were outstanding as at 1 April 2004.

Table 2.2m: Outstanding arrears of community charge and council tax

2.3 Business rates

2.3.1 Since 1 April 1990 most non-domestic properties in England have been liable to nationally-set business rates, which are also known as national non-domestic rates (NNDR) (or sometimes the unified business rate). Before 1990, business rates were set locally. Since then, they have been set nationally, and paid into a central pool. They are then distributed among local authorities on a per head basis, with the payments being regarded as a type of government grant. Further details of this are given in section 2.4.

2.3.2 Liable properties include public buildings, pipelines and advertising hoardings, as well as businesses. However, some non-domestic properties, such as agricultural land and associated buildings, and churches, are exempt. Each property liable to business rates is known as a hereditament, and is recorded on a rating list that is compiled and maintained by the Valuation Office Agency of HM Revenue and Customs.

Table 2.3a: Number of non-domestic hereditaments on local rating lists at 1 April 2005

2.3.3 Each property has a rateable value that is based, broadly, on the annual rent that the property could have been let for on the open market at a particular date (currently 1 April 2003, using a list compiled for 1 April 2005).

2.3.4 In broad terms, the rates bill for a property is the product of its rateable value and the relevant national non-domestic rating multiplier. For 2005/06, this is 41.5p in the pound for ratepayers eligible for small business rate relief, and 42.2p in the pound for other properties. Further adjustments may be made for other reliefs.

Table 2.3b: Rateable values on local rating lists at 1 April 2005

2.3.5 Rate reliefs can be granted in certain circumstances by local authorities. Mandatory reliefs are automatic entitlements in any local authority area, and discretionary reliefs are granted at a local authority's discretion, and paid for by them. An example of these two types of relief is properties held by charities, which are automatically entitled to mandatory relief of 80% and where local authorities have the discretion to top the amount up to 100%.

2.3.6 In addition, at a revaluation, transitional arrangements are introduced which cap significant increases in bills. The 2005 transitional scheme phases in increases for a maximum of four years. The scheme has to be revenue neutral and so the cost of the relief is made good by phasing in the decreases in the rate bills of those who benefit from revaluation.

Table 2.3c: Mandatory and discretionary rate reliefs

  • The gross business rate yield from local lists has increased by 49% from £12.0 billion in 1990-91 to £17.9 billion in 2005-06. This is partially due to almost all crown properties moving to the local list. In addition, from 2000-01 certain hereditaments transferred from the central to the local list.
  • Contributions to the pool from local lists has increased by 82% over the same period due to the effects of transition, and changes to the policy on mandatory and discretionary reliefs.

Table 2.3d: Business rate yields since 1990-91

  • Whilst 31% of the population live in London and the South East, these regions account for 43% of the net business rate yield.

Table 2.3e: Business rate yields by region 2005–06

  • The average in-year business rate collection rate has been gradually increasing, reaching 98.3% nationally in 2003-04, a figure maintained in 2004-05.

Table 2.3f: Collection rates(a): business rates 1998-99 to 2004-05

2.3.7 As with council taxes, the collection of business rates continues once the financial year to which they relate has ended; this means that the final collection rate achieved is somewhere between the figures shown and 100%.

It is estimated that £713 million of business rate arrears were outstanding as at 31 March 2005.

Table 2.3g: Business rate arrears 1998-99 to 2004-05

2.3.8 Having been collected, the income from business rates is paid into a central pool and is then redistributed to local authorities on the basis of population. Each year, the Government estimates how much will be redistributed from the pool in the forthcoming year, based on the amount likely to be paid into it and the difference in previous years between the amounts payable to the pool and the amounts paid from it. This is known as the Distributable Amount. The calculation of the Distributable Amount for 2005-06 is shown in Table 2.3h.

2.3.9 Business rates come mainly from two sources: properties on local rating lists (which from 2000-01 have included Crown properties, such as central government properties and Ministry of Defence establishments) and properties on the central list (such as national utilities and pipelines etc). The income from properties on local rating lists is collected by billing authorities and paid by them into the pool.

2.3.10 Ratepayers can find further information on non-domestic rates on the VOA managed website www.mybusinessrates.gov.uk

2.3.11 Further information on rateable values and business rates is given in the HM Revenue and Customs's Non-domestic rating in England and Wales, which can be seen at www.hmrc.gov.uk/stats/non_domestic/menu.htm. Further information on rateable values can also be seen in Commercial and Industrial Floorspace Statistics in the Planning statistics section of the Planning section of the ODPM website.

  • The amount being redistributed to local authorities in 2005-06 is £18.0 billion.

Table 2.3h: Calculation of the Distributable Amount for 2005-06(a)

2.4 Revenue grants

2.4.1 The main non-housing revenue grants are referred to collectively as Aggregate External Finance (AEF). AEF includes Revenue Support Grant (RSG), redistributed business rates and certain specific grants. From 2003-04, redistributed business rates, RSG and Police Grant (where appropriate) were distributed together as Formula Grant. Specific grants are distributed by individual government departments.

2.4.2 AEF does not include housing subsidy, which is administered and recorded separately, as part of the Housing Revenue Account (HRA). See Chapter 3 for further details of housing subsidy.

  • In 2003-04 AEF was £57.4 billion, up from £49.3 billion in 2002-03. The figures are not, however, directly comparable between years, due to changes in the responsibility for various functions.
  • Between 2002-03 and 2003-04, specific and special grants increased by £4.5 billion to £13.4 billion. This was partly due to the introduction of Supporting People grant in 2003-04, which accounted for £1.6 billion of this increase. In addition, Greater London Authority (GLA) Transport grant increased by £1.7 billion from 2002-03 to 2003-04.

Table 2.4a: Aggregate external finance provided to local authorities, 1998-99 to 2003-04

  • The average grant per head towards revenue expenditure in 2003-04 was £1,151.
  • At a regional level, figures varied from £885 in the South East to £1,244 in the North East and £1,844 in London.

Table 2.4b: Grants towards revenue expenditure by region, 2003-04

2.4.3 Formula Grant (RSG, redistributed business rates and Police Grant) is the largest revenue grant paid to local government. It is not provided for a specific purpose and so can be spent on any service. From 1990-91 to 2002-03, it was allocated to local authorities through the Standard Spending Assessments (SSA) system. Following an extensive review of the Formula Grant Distribution System, from 2003-04 Formula Grant is being allocated to authorities using the new Formula Spending Shares (FSS) system. The current system is built on a basic 'per client' amount for each service area with top ups for deprivation, area costs etc. Formula Grant also takes into account each authority's expected ability to collect local income from council tax.

Table 2.4c: Distribution of specific grants across services, 1998-99 to 2003-04

2.4.4 Further information on specific grants in 2003-04 (outturn figures) and 2005-06 (budget figures) are given in Table C2b and Table C4b of Annex C.

2.5 Sales, fees and charges

2.5.1 Sales, fees and charges are the amounts received by local government as a result of providing a service. They vary widely between services in both the amount of money involved, and their nature, for example library fines and planning application fees.

  • Sales, fees and charges totalled £9.5 billion in 2003-04, up from £8.9 billion in 2002-03.
  • One of the biggest increases between 2002-03 and 2003-04 was for public transport. This was partly due to the introduction of congestion charging in central London.

Table 2.5a: Sales, fees and charges by service area, 1998-99 to 2003-04(a)

[ Chapter 1 ] [ Contents ] [ Chapter 3 ]

Last updated on 28 November 2005
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