England’s councils are big business! From the smallest district council to the largest unitary authority, councils manage billions in spending. Data from the 2024-25 budgets puts total income and expenditure (excluding social housing) at £166bn, with services including social care, policing, waste collection and education. 

The growing role of council finance teams

Finance teams are intrinsic to managing these budgets effectively, ensuring that key services are delivered and the council is managed efficiently. There is no single model for how council finance teams operate. Strategic and operational preferences aside, there is a variety of council structures to consider. 

Martin Wheatcroft, an advisor and author on public finances and Fellow of ICAEW, explains: “Some areas have unitary councils and metropolitan boroughs, which are single councils that do everything. In others, there is a two-tier system of county and district councils, each with different responsibilities in delivering services.”

Council finance teams carry out all the tasks expected of the finance function in any large organisation. They have to manage budgets, plan and forecast financial performance, keep the books and handle treasury management. They also have to communicate and report financial performance internally and externally. Internal communication and relationship building are essential for aiding decision-making across the organisation. While externally, finance teams need to work with auditors and demonstrate they have the appropriate financial controls in place and support the organisation’s governance structure.

In contrast to the private sector, several notable differences exist in managing local government finances. “In some respects, council finances are relatively straightforward in terms of how they collect and spend money,” says Wheatcroft. “It is not like they are financial institutions trading complex financial instruments that have to be accounted for. However, there are set rules councils must follow when managing their budget and finances that differ from those of the private sector. There are also several sectoral idiosyncrasies in managing each income stream."

How funds are raised

Local government funding comes from a combination of:

• central government grants and subsidies,
• business rates,
• council tax, and
• external income. 

Central government funding is the most significant income stream. However, with cuts to funding since the early 2010s, its relative importance in the financing mix has reduced considerably. Figures for 2024-25 show that central government funding accounts for 49% (£82bn) of the revenue mix.

Government financing takes several forms. The Revenue Support Grant can be used for any type of expenditure with the amount awarded calculated using a funding formula and delivered through the annual local government finance settlement.

There are also grants for funding-designated services administered by the relevant government departments. For instance, the Home Office administers the Police Grant, which provides general funding for local policing.

Finally, there are multiple other funds and grants to which councils can apply for certain projects, such as the Future High Streets Fund or for achieving specific goals, such as the New Homes Bonus Grant.

Together, the number and variety of funds and grants make for a complex financing landscape for finance teams to navigate, "Any given council will have around 100 funding streams from central government,” says Wheatcroft. “For many, they must submit applications. Then, depending on the terms of the grant, they may have to report back to the grant provider and demonstrate they have met the stipulated conditions.”

Council tax

Council tax forms the second largest component of local government income streams, accounting for 25% (£41bn) of budgeted income in 2024-25. Councils set the tax rate, but under the Localism Act 2011, they are limited by how much they can increase rates without triggering a local referendum. Councils with social care responsibilities are limited to annual increases of 4.99%, while other councils can increase rates by up to 2.99%. “Most councils will increase rates at the maximum each year or just under if they are trying to make a political point,” says Wheatcroft.

Aside from managing council tax rates, finance teams must ensure that the council has the necessary core processes to count all properties, collect tax and follow up on late or missing payments. One challenge is managing property valuation bands. “You’re not collecting enough money if you have Band C houses that should be in Band D,” says Wheatcroft. On top of this, councils must administer their own Council Tax Reduction schemes to provide additional support where needed and manage Single Occupancy Discount processes.

Business rates

Business rates account for 12% (£20bn) of local government income and finance teams have to forecast and report on business rates collection. Rates are set centrally for the whole of England with the rateable value of properties managed by the Valuation Office Agency. The funds are collected locally and distributed using a complex formula, partly due to tariffs and top-ups associated with the scheme. This means that wealthier councils, with proportionately higher business-rate income, pay levies to fund top-ups for councils with a lower business-rate income. Under the Business Rates Retention Scheme introduced in 2013, councils can potentially retain a proportion of the business rates they collect giving finance teams a strategic role in helping local authorities attract businesses to the area or in encouraging them to expand, according to Wheatcroft. 

External revenue

Income raised from other external sources accounts for 13% (£21bn) of total revenue, excluding social housing. This proportion has grown appreciably over the last decade as councils have sought to commercialise and broaden their income in light of falling government funding. Common examples of external revenue streams include rent from buildings, pitch fees for markets, parking charges, and returns from leisure facilities.

Beyond the more prevalent revenue-raising measures, some councils have sought to diversify their income through other riskier investments, throwing the spotlight on risk-management processes. “Some councils borrowed quite heavily when borrowing costs were low and invested in projects, some more wisely than others,” says Wheatcroft. “Croydon lost money in property development; Nottingham created an energy company that failed; and Thurrock lent a lot of money to solar farms, much of which it won’t get back. Of course, failures receive more publicity than successes, but there are lessons to learn in managing investments and the associated risk.”