Council tax rises will help ensure local authorities are funded next year, a minister has said as he rejected Tory claims of a £2.4 billion “black hole”.

Communities minister Matthew Pennycook said the Government expects an additional £1.8 billion to be raised through council tax in 2025/26, adding that business rates and funding connected to new homes will contribute £600 million.

The new Labour administration will continue with current rules that allow councils in England to increase tax rates by up to 3%, plus an additional 2% for those authorities providing adult social care.

Councils wishing to increase tax rates by more than the up-to-5% cap are required to receive Government permission or hold a referendum.

This means the average band D council tax household faces an above-inflation increase amounting to more than £100 next year.

Responding to an urgent question from the Conservatives, Mr Pennycook told the Commons: “Decisions on the council tax levels to set or whether to hold a referendum to go beyond the referendum principles sits with councils.

“But the Government has been clear that it expects the threshold to be maintained at the current level set by the previous government.”

It is right that £1.8 billion will be raised through council tax in 2025/26.

Mr Pennycook said the Conservatives created a “mess” in local government, adding: “That’s why at the Budget we announced over £4 billion in new local government funding, including an additional £1.3 billion in the local government finance settlement.”

Ministers have said estimated core spending power for local government will increase from £64.7 billion in 2024/25 to £68.4 billion in 2025/26.

Shadow communities minister David Simmonds said: “Answers to parliamentary questions show that the Government is expecting spending power to increase by £3.7 billion, funded by grants of £1.3 billion.

“That demonstrates that the Chancellor’s Budget has opened up a £2.4 billion black hole in council finances.”

The Chancellor's Budget has opened up a £2.4 billion black hole in council finances

Mr Pennycook replied: “The Government is committed to a fair funding settlement for local government. We will set out further details in the usual way in the upcoming local government finance settlement, which will be presented to Parliament.

“On the £2.4 billion figure, I’m afraid we simply don’t recognise it. I assume (Mr Simmonds) in his calculations has failed to take account of the over £300 million raised in business rates, £300 million in additional new houses to come along.

“So it is right that £1.8 billion will be raised through council tax in 2025/26, but as I made clear that is because the Government is clear that we’re maintaining the previous government’s policy on council tax, in line with the OBR (Office for Budget Responsibility) forecast made in March 2024.”

Speaking from the Liberal Democrat front bench, Lee Dillion (Newbury) asked: “Can the minister ensure that councils do not have to close libraries, cut bus routes and reduce road repairs in order to meet the growing demand for the most vulnerable members of our community and despite the announcements in the Budget, will the minister also recognise the LGA (Local Government Association) analysis that actually councils face a £6.9 billion shortfall because of inflation, increase wage demand and demand pressures on local services?”

Mr Dillon said his party was concerned “people are simply paying more council tax for fewer services”.

The minister did not say whether town halls would have to consider closing libraries, axing bus routes and scaling back road repairs but acknowledged “the pressures on local authorities and the burdens placed on households as a result of 14 years in which local government was run down”.

Mr Pennycook, who later suggested the Conservatives had “more front than Harrods”, said: “We’re determined to turn that situation around by providing the headroom that local authorities need to get ahead of some of these challenges that they’ve been facing for many years and that is why the over £4 billion in Government funding announced at the Budget – including an additional £1.3 billion in the Local Government Finance Settlement – has been so warmly welcomed.”

He added: “We continue to remain committed to the 5% referent cap, that is the right threshold we believe. We’re also committed in terms of protecting the most vulnerable with the single person discount and local council tax support schemes.”

Labour backbencher Clive Betts (Sheffield South East) suggested councils might in future have the freedom to raise tax as they wish.

He proposed “a conversation with councils and the public more widely about whether thresholds at all are appropriate”.

Conservative MP Bob Blackman (Harrow East) asked whether the Government had “any plans whatsoever to do a revaluation of properties” to assess which bands they fall into.

English property banding is currently based on 1991 property prices.

Mr Pennycook replied: “He tempts me to discuss the Local Government Finance Settlement ahead of it being formally presented to this House.

“I’m afraid I can’t do that.”