Can Labour really reform council tax and ensure that it is levied at 0.5% of property values ​​every year?

Rumours that the municipal tax would be radically revised and replaced by a 0.5 percent tax based on the value of a house are circulating in the press and on social media.

Council tax is one area that Labour could theoretically change. Labour’s manifesto financial pledges included no increases in National Insurance, Income Tax or VAT, but left other taxes open.

But given that this could mean a huge increase in bills for some, including older people living in expensive homes but on relatively low incomes, how likely is it that this will happen?

Could Labour risk a poll tax-style revolt by changing council tax? We look at what that would mean and whether it could happen.

How does the municipal tax work now?

When the current council tax was introduced in 1991, every property in England and Wales was valued and placed into one of eight council tax bands.

Band A is for properties valued under £40,000, where owners pay the lowest council tax. Band H is for properties valued at £320,000 or more, where owners pay the highest tax.

The tires are still being used, despite the fact that the average house price has risen by around 400 percent, according to figures from the Land Registry.

Does Labour want to reform council tax?

Labour has given mixed signals on council tax reform. Some Labour frontbenchers are in favour, some are not, and some have changed their minds.

Prime Minister Keir Starmer is one example. Starmer has previously described the Welsh Labour government’s plans for council tax reform as “a blueprint for what Labour can do in the UK”.

Welsh Labour wants to reclassify Welsh properties for council tax, and introduce higher tax bands. This would not happen until 2028 and requires Welsh Labour to maintain their lead after the 2026 Welsh election.

However, Starmer also said that “council tax was too high for too many people” and that he “didn’t want to increase tax” when interviewed by Sky News in June 2024.

Former shadow minister Jonathan Ashworth has also openly stated that Labour has no plans to change council tax rates.

Chancellor Rachel Reeves has backed council tax reform, as has Culture Secretary Lisa Nandy.

How likely is it that Labour will change council tax?

At the moment, it’s impossible to say. The government certainly has an incentive to raise money, with Rachel Reeves stating this week that the Conservatives have left a £22 billion hole in the country’s finances.

Changing the municipal tax would not make any significant difference here, as local authorities get to keep all the money paid to them by the residents of their area.

But an across-the-board increase in council tax would ease pressure on other government spending and could be used to improve local services.

Council tax is also one of the taxes that the Labour Party has left open to change, as no separate provision had been made for it before the election.

How would Labour reform council tax?

There are several options for council tax reform. The one that is being rumoured is an idea backed by Labour MP and former director of the Resolution Foundation think tank Torsten Bell, which would introduce a system based on house prices.

This abolishes municipal tax rates and instead, households pay a percentage of the house price in municipal tax each year.

Depending on the tax level, municipal tax may decrease for some homes, while it increases for other homes.

There could be huge price rises for properties in London and the home counties, but also in the South, South West and other affluent areas or areas popular with second home owners.

According to the Office for National Statistics, the average home in the UK is now worth £285,000, while an average Category D home pays £2,065 in council tax each year.

This equates to an effective municipal tax rate of 0.73 percent per year, based on the value.

So a 0.5 percent council tax would mean lower bills for some, but this varies considerably depending on where you live.

For example, according to the Nationwide Building Society, the average house price in London is £525,248. So theoretically, that would equate to a bill of £2,626 for an average home there.

Overall, bills could rise significantly in the south of England, but would fall in the north of England, Wales and Northern Ireland.

An analysis by the think tank Institute for Fiscal Studies found that a proportional council tax would ‘narrow the wealth gap between owners of expensive and cheap properties’.

But the IFS added that this would mean homes in 124 local authorities in England alone would cost more, raising council tax on more than 4 million homes by £1,230 a year.

Another option to change the municipal tax system is to retain the current system and adjust the rates to modern house prices.

But changing council tax would be a major challenge – even if Labour wanted it. The process would involve consultation and drafting new legislation.

But the biggest challenge will be homeowners, especially if the council tax reform leads to higher bills.

While inflation has fallen to the Bank of England’s 2 percent target, the cost of living remains high compared with pre-2021 levels.

Households struggling with high energy bills, rent, mortgages and groceries can object if their municipal tax also increases.

Will Labour approve or reject the council tax changes?

The Labour Party has been asked to comment on whether there are plans to change the operation of municipal taxes.