What happens if your council goes ‘bankrupt’?
Birmingham City Council hit the headlines last week after it approved a 10% rise in council tax in each of the next two financial years.
It comes after the local authority effectively declared bankruptcy in September and revealed it needs to save £300m by 2026. But Birmingham City Council isn't the only town hall in financial trouble.
Here, Which? takes a look at what it means for a council to go bust, how common it is and what help is available for residents facing council tax hikes as a result.
What does it mean when a council goes ‘bankrupt’?
Technically, a council can't declare bankruptcy. Instead, they issue what's called a Section 114 notice. This indicates that its forecasted income is insufficient to meet its expenditure.
After that, they can't commit to any new spending and must come up with a fresh budget within 21 days.
Which councils have issued Section 114 notices?
Data compiled by the Institute for Government shows councils have issued the notices 14 times since the Local Government Finance Act 1988 became law. The first was issued by Hillingdon and the second was Hackney, both in 2000.
While that doesn't sound like that many over the space of 35 years, it's become more frequent. Data shows 71% of all Section 114 notices were issued in the past six years.
Some councils have found themselves in hot water more than once, too. Croydon has issued the notice three times since 2018 – more than any other council – and Nottingham has done so twice, most recently in November 2023.
Northamptonshire, Croydon, Thurrock, Woking, Slough, Nottingham and Northumberland have all issued Section 114 notices since 2018 and the Local Government Association says one in five council leaders in England believes they are likely to declare bankruptcy in the next 15 months.
Why are councils issuing Section 114 notices?
There are various reasons why a council might fall on hard times and it's not always because of financial mismanagement. For Birmingham, Europe's largest local authority, it was a £760m equal pay claim and a botched new IT system that eventually sunk the ship.
Sharp cuts to government funding during the first half of the 2010s also helped push some councils over a financial cliff edge, claims the Institute for Government. At the same time, demand for council services, such as children and adult social care has surged.
As a result of these pressures, councils have looked to other sources of income, such as investing in commercial property. But record-high inflation and soaring interest rates have meant some of these assets were not the cash cows councils hoped them to be.
- Find out more: what's happening to inflation?
How does a Section 114 notice affect you?
While central government will sometimes help with extra funding or intervene in the management of a struggling local authority, there are two main ways councils stay afloat:
Council tax rises
Local authorities often try to fill major funding gaps by hiking council tax.
The cap for council tax rises in England from this April remains unchanged from the 2023-24 financial year, at 5% for authorities with responsibility for social care.
But some councils that are in financial trouble, are given special permission from the government to raise rates even more.
After issuing a Section 114 notice last year, Croydon Council was allowed to increase council tax by 15% for 2023-24.
This year, four councils which have previously issued Section 114 notices – Birmingham, Woking, Slough and Thurrock – were told they could raise council tax by 10%.
Birmingham’s rise will take the annual council tax bill for council services for a Band D property from £1,630 to £1,793 in 2024-25 – a £162 increase.
Spending cuts
Unfortunately, councils that find themselves in serious financial trouble often have little choice but to reduce spending on public services to make savings.
Because councils have a statutory duty to provide certain services, such as social care, their powers to curb funding are limited. Instead, local authorities may look to make savings in other areas which they don't consider essential.
In Birmingham the council has slashed its arts budget by 100%
In Birmingham, for instance, the council has slashed its arts budget by 100%. Draft budget documents published last week also describe plans to make savings of £51m on children's services. Bin collections will also be reduced to fortnightly and street lights dimmed to save £900,000.
‘Birmingham is charging more but cutting services’
Jon moved to Birmingham in 1972 and says he's not surprised the council has fallen on hard times.
'It's a huge council and financial issues have been apparent for some time,' he explains. 'The ongoing equality pay claims have been rumbling on and over the years payments from government have shrunk, as they have for most councils.'
Although Jon, who is now retired, left Birmingham to move to Worcestershire in 2022, his daughter still lives there. She works for the NHS and purchased her house at a time when mortgage rates surged. He now worries about the possible strain the planned rise in council tax will have on her bank account.
He says: 'She feels it is very unfair that the council are going to cause her financial stress, while at the same time reducing the services she receives. If they keep cutting services while charging more, then what on earth is she paying for?'
Birmingham City Council told Which? that help for households struggling to pay council tax won't be affected by budget cuts. Depending on circumstances, residents can still apply for rescheduling of payments, hardship relief or a reduction of their bill.
- Find out more: cost of living advice
What's being done to tackle the problem?
The government is under increasing pressure to step in and boost funding to councils now, before more go bust. While the Chancellor didn't mention any specific help in the Spring Budget, levelling up secretary Michael Gove has already confirmed that English local authorities will receive an extra £600m in funding.
A total of 19 councils, including Birmingham, Woking, Thurrock, Slough, Nottingham and Croydon, will also be given special permission to sell property and other assets to pay for services next year. Local authorities are usually banned from doing this. The move will allow these cash-strapped councils to raise up to £1.5bn.
Council tax is also set to go up. In April, 75% of councils in England are expected to introduce the maximum 5% increase, according to the County Councils Network. This would add £100 to the average band D bill in England.
In Wales, which has powers to cap council tax but hasn't used them since devolution, bills are expected to rise by even more. Pembrokeshire, for example, will hike council tax by 12.5%, while residents in Ceredigion will pay 11.1% more from April.
However, If you live in Scotland, council tax will be frozen in 2024-25 and will remain unchanged until April 2025. Northern Ireland uses a domestic poundage system, which works in a different way to council tax.
Councils in England had until 11 March to decide how much to put council tax up by and Which? will explore what the rises will mean to you when the full figures are released at the end of this month.
Councils are also planning cuts to avoid going under. A survey of senior council leaders and officers by the Local Government Information Unit, with responses from 128 authorities in England, found one third of councils plan to cut spending on parks and leisure. Another third intends to cut arts and culture and one in 10 will cut services for children with special educational needs and disabilities.
- Find out more: council tax calculator 2023-24 - find out what you’ve been paying
What to do if your council issues a Section 114 notice
If your council issues a Section 114 notice, there shouldn’t be any immediate changes to your day-to-day life.
The council will place a hold on new spending, but essential services like schools, waste collection and road maintenance will continue as usual.
However, in the background, the council will need to make revisions to budget plans and you may be able to join local meetings or complete surveys on how the budgeting issues will be resolved. Look out for these events on your local council’s website.
Take steps to reduce your bill
It’s likely your council tax bill will go up, but this can only happen in the new financial year so you may have some breathing room before then. In the meantime, you may be able to take steps to reduce your council tax bill.
Depending on your circumstances, you may qualify for a council tax discount of 25%. You can get this discount if you live alone or with others who are 'disregarded' for council tax purposes, such as full-time students.
Other reductions may be available on empty properties, as well as second homes and holiday homes. These discounts aren't applied automatically, so if you think you fit the bill, you’ll need to write to the council and make your case.
Reviewing your council tax band is another option if you think the original valuation of your home might have been wrong, or changes made to the property's use or size since its valuation might alter the band it should sit in.
Just bear in mind that while a move to a lower council tax band would see your bills get cheaper and likely get you a council tax refund for the tax you've overpaid, it's also possible to be reclassified into a higher band, which would increase your bills.
- Find out more: reducing your council tax bill
Get help if you can’t pay your bill
Failing to pay your council tax bill can have serious consequences.
If you don't pay after receiving a final notice, then councils can take legal action, including getting your employer to pay your unpaid council tax directly from your wages or sending in bailiffs. If everything else fails, then you can be taken to court and even face prison time.
There are a few things you can do if you're struggling, however:
- Contact your local authority: ask about reducing or rescheduling payments. You'll probably need to provide evidence that your savings, earnings or other assets can't cover what you owe.
- Apply for hardship relief: this can help if you're experiencing 'exceptional hardship' beyond your control.
- Apply for council tax reduction: the way this works depends on where you live, but you could be eligible if you're on a low income or receive benefits.
Find out more: our guide to paying council tax has more details on what to do if you don't think you can pay your council tax bill
