Rachel Reeves has pledged the biggest shake-up to council tax in three decades, in a move that will hit those with expensive homes hardest.
Homes in England deemed to be worth more than £2million – mostly in London and the South East – will face a surcharge on top of their council tax which is being deemed a mansion tax.
This will start at £2,500 per year all the way up to £7,500 on top of their existing council tax, and the charge will rise by inflation each year. It could see some paying more than £10,000 in council tax.
One couple who will be hit by the levy told the Daily Mail it was ‘vindictive and a tax of envy for hard-working people,’ saying they felt punished for saving hard and climbing the property ladder over many years – as well as paying the associated taxes.
Target: Rachel Reeves has imposed a ‘mansion tax’ on the most expensive homes
Council tax is considered unfair by many. The property values it is based on are 30 years out of date, and some areas pay much more than others despite their homes being far cheaper.
And while the new system will charge more to those with expensive homes, it won’t make them cheaper for those in more modest homes who currently feel they are losing out.
We explain how council tax rates are decided, how much it raises, what it pays for and whether there is a better way to fund local services.
How does council tax work?
Currently, homes are put in bands varying from A, the cheapest, to H, the most expensive. These bands are based on house prices back in 1991 when council tax in its current form began.
Band A applies to homes that were worth less than £40,000 in 1991, rising to H which is for homes worth £320,000 or more at that time.
The average council tax bill for a band D home in England in 2025-26 is £2,280, according to official data.
There is generally a 25 per cent discount for people who live alone, and a 50 per cent discount if a property is empty. Students also get a discount.
It is paid by a property’s occupants, so someone renting their home is liable to pay and not the landlord.
Those who have a second home can also be charged up to two times the normal council tax in their area.
Council tax will raise a combined £50.2billion in 2025-26, according to the Office for Budget Responsibility.
What has Rachel Reeves changed?
From April 2028, owners of properties identified as being valued at over £2million by the Valuation Office (in 2026 prices) will be liable for a recurring annual charge on top of council tax.
There will be four price bands with the surcharge, rising from £2,500 for a property valued in the lowest £2million to £2.5 million band, to £7,500 for a property valued in the highest band of £5 million or more. These will rise by consumer price index inflation each year.
Although only around 100,000 properties are thought to be directly in the firing line, experts have warned of an major impact for the property market.
Over the next three years before the charge takes effect it is expected to cost the Government £300million due to falling stamp duty revenue. After that it will only raise £400million annually.
It was previously said that Reeves would look to revalue properties in the top council tax bands, F, G and H in the Budget, comprising 2.4million homes.
This revaluation would be a huge and costly task for the Government and appears to have been scrapped.
This vindictive tax has left our retirement in tatters
Ali Bogle and husband Angus had been looking forward to a well-earned retirement in the East Sussex village of Primmers Green, writes Toby Walne – but that dream now lies in tatters.
The mansion tax is a body blow that Ali, 63, says will cripple the family – destroying four decades of scrimping, saving, working hard, paying taxes and careful planning.
The couple had been looking to selling the family home for £2.25million but these plans have been thrown into chaos. They may now rent it out and downsize.
From the outside Ali and Angus, 61, look to be sitting pretty in a seven-bedroom Georgian home on the outskirts of the market town of Wadhurst.
But scratch beneath the surface and the couple admit to having sunk their life savings into renovating the property, which they purchased in a dilapidated state 15 years ago for £1million.
Investment: The seven-bedroom Georgian family home near Wadhurst, Sussex which Ali and Angus Bogle sunk their life savings into
Now their financial investments are ruined. The couple, who have three grown up children, were not born into money but have worked hard as they slowly climbed the property ladder, buying their first home, a £90,000 two-bed flat in Clapham, south London, 36 years ago.
Ali says: ‘Friends thought we were mad at a time when people were falling into negative equity, losing money selling homes, and you paid 15 per cent interest on mortgage loans. But we rolled up our sleeves and spent money on a home rather than splash out on fast cars and holidays.’
She adds: ‘But now we are getting punished. All this talk of ‘those with the broadest shoulders’ footing the bill is disingenuous. It is vindictive and a tax of envy for hard working people.
‘We may now be forced to take the home off the market and rent it out instead as we downsize. It stifles the property market because it means we are unable to help our children with deposits as we cannot sell. I am furious as we have always paid our taxes in full, including stamp duty for homes purchases and VAT for home renovations – and never claimed a penny in return.’
Ali believes mansion tax will only depress the already fragile property market with buyers frightened off moving.
‘This tax will have a knock-on effect for everyone – with people unable to move home. First time buyers will struggle to find properties and with the expectation of council tax hikes as well we are facing a gloomy future.’
The only ray of hope is mansion tax will not be introduced for three years. Ali says: ‘Let’s just hope this shambolic Government will have been voted out by then.’
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What does it pay for?
The largest chunk of council tax in any authority usually goes towards social care for adults and children.
Councils are struggling to meet the huge bill involved with caring for the elderly, as people live for longer and funding declines.
It also pays for parts of the school system, council housing, refuse and recycling, street maintenance and repairs, planning applications, council-run leisure centres, trading standards, cemeteries, birth death and marriage registrations and more.
Council tax isn’t local authorities’ only source of income. They also make money from things like parking charges, and the fees charged to homeowners and property developers for planning applications.
What are the problems with it?
First, it is based on old data. Property values have increased hugely since 1991 when the bands were decided, especially in London and the South East.
In areas where house prices have risen rapidly, those living in very expensive homes can have council tax bills which pale in comparison to their home’s value.
Figures from PropertyData highlight a house in Kilburn, North West London, that sold in July 2024 for £3.46million.
Based on its 1991 value, it is in band F – which takes in properties worth between £120,001 and 160,000 at that time. The homeowner there will pay £2,940.96 in council tax each year or 0.03 per cent of its value.
But the new owner of a band F house in Preston, which sold in December 2024 for £202,500, would pay £3,396.94 or 1.67 per cent of its value – despite the London home being worth 16 times as much.
The surcharge will attempt to make up for this disparity. However, Paula Higgins, chief executive of the Homeowners Alliance, says today’s changes were ‘unfair’ because the whole system needs to be updated – not just the higher end.
She says: ‘Trying to bolt new charges onto a 34-year-old valuation system risks huge distortions – punishing some households purely because their area has risen in value or they have invested in their home, while others with equally valuable homes escape.’
Another quirk of council tax is that the number of people in a property makes little difference to the overall bill, save for the single person discount.
It is charged to the total household, so a family with two adults and one child would pay the same as a house share with five working-age people.
The poll tax introduced in the late 1980s under Margaret Thatcher was an attempt to charge a levy for local services to each individual, rather than to the whole household.
However, this was extremely unpopular and was scrapped, which led to the council tax system we have today.
Another problem is that the rates vary widely across the country.
Why does council tax vary so much across England?
There are some obvious geographical disparities. In Wandsworth, south London, the average council tax bill for someone living in a Band D property is £990.07 while in Newcastle, the average Band D property currently pays £2,463.98 in council tax.
That’s despite the average property in Wandsworth being £691,000 compared to £205,000 in Newcastle.
John R. Bryson, professor of enterprise and economic geography at the University of Birmingham, told This is Money this is because some local authorities require more money to fund their local services.
For example, if they have a lower proportion of people of working age who pay taxes, and a higher proportion of older adults requiring social care, they will probably charge more council tax.
He says: ‘The actual amount that is charged by a local authority reflects the context of the local area.
‘Differences between councils in terms of what is charged partly reflect the ratio between positive taxpayers, who pay more in to support the council compared to the amount of service support they obtain, and dependent service users who represent a charge on the provision of council services.’
It is unclear how the revenue from the new tax surcharge will be distributed, but it could provide a surge in revenue for councils in wealthy areas.
The revenues from the surcharge will flow to central government rather than remain with local government, as is the case for standard council tax.
Who will be hit by the changes?
It will disproportionately hit homes in the South East, London and the East of England where values are highest.
Dominic Agace, chief executive of leading estate agents Winkworth, called it ‘a terrace tax, not a mansion tax’ in the capital.
‘Many people living in London in £2m plus homes are those who are leveraged with large mortgages or those with their property as their only asset and living on a small retirement income,’ he says.
James Evans, CEO at London real estate agent Douglas & Gordon says: ‘Many could see their bills jump overnight, simply because of where they live.
‘This isn’t about fairness. Instead, it’s squeezing more out of those who’ve worked hard to own a home in the capital. For families already facing high costs, it’s another blow’.
It will be even more problematic for people who live in an expensive home, but don’t have the income or savings to afford the new tax.
Professor Bryson adds: ‘In many respects the link that has been forged by government between house value – the eight council tax bands – and how much is paid to support local services is artificial.
‘The problem is that an individual might be asset or property rich whilst being poor in terms of actual annual disposable income.
‘Thus, there is no link between house value and the ability to afford high levels of council tax, and there is no link between house value and how dependent that house’s residents are on support provided by the local authority.’
The new taxes could be especially detrimental to people who bought their property a long time ago and have benefited from years of price rises – especially if they are now retired and on a modest pension.
Those who inherited their home, but have a lower income than the person who left it to them, could also suffer.
There will be a deferral scheme for those who can’t pay immediately.
People who pay a high council tax bill as a proportion of their home’s value won’t pay any less under the new system, as their bands will stay the same.
London tax: Those in the capital and its surrounds are set to suffer most from new levy
What will it do to the property market?
This could make homes worth around £2million harder to sell, with people whose budget is around that mark opting to buy a slightly cheaper home so they don’t have to pay the annual levy.
It could also prevent people who would otherwise have upsized to a very expensive home from doing so. That could have a knock-on effect lower down the housing market, with fewer people moving home.
According to the high-end estate agent Knight Frank, it could also skew home values in areas such as London. Homes near to, but under, £2million could see much more competition, but the market for those slightly over is set to struggle.
The Office for Budget Responsibility acknowledged this in its report saying there could be ‘price bunching to just below each band boundary’ and that this could lead to a reduction in eligible homes.
Tom Bill, head of UK residential research, at Knight Frank. ‘Does valuing a property just above a particular threshold, thus making it liable for an additional payment, itself reduce the value?’ Will people be put off renovating or extending their homes?
‘That is before the inevitable headlines about pensioners living in larger houses being forced to leave their neighbourhoods.’
How often can council tax rise?
Annually, at a percentage decided by the Ministry of Housing, Communities and Local Government.
For example, in 2025-26, the Government allowed councils to raise council tax by up to 5 per cent. Most increased it by that level, or close to it.
If they want to increase rates by more than this, councils need to hold a local referendum – which they would be unlikely to win.
However, Government can also give them permission to raise more in exceptional cases.
This year, a handful of councils were able to raise council tax by 7.5 per cent or 9 per cent, while the City of Bradford was allowed an increase of 10 per cent.
Is there a better system?
There have been widespread calls for reform of council tax for many years.
It has also been suggested that the Government could raise additional funds by creating new council tax bands above H, for the most expensive homes.
A further suggestion that was said to be considered for this Budget, but ultimately did not happen, was replacing stamp duty and council tax with a new annual property tax on homes above £500,000.
The idea for this came from a report last year by Tim Leunig, chief economist at centre-right leaning think-tank Onward.
There would also be a local property tax to replace council tax for all homes.
This would be charged at 0.44 per cent a year on the first £500,000 of all homes, capped at £2,200, with a minimum charge of £800 per household per year.
It would mean that in areas where house prices are cheaper, households would have much to gain.
Renters would not have to pay under this system, with the burden falling to landlords.
Should we switch to Irish council tax model?
There are many alternative systems used in other countries. In some places people pay income tax directly to their local council, rather the Government, and in other countries all local services are funded out of central taxation.
Professor Bryson says the Republic of Ireland’s system is one that works well, as it has many more bands, and homeowners provide their own valuations rather than this being done centrally which could be expensive for the Government.
Every homeowner is required to submit a valuation of their property to the Inland Revenue in a Local Property Tax return. It is then placed in one of 19 bands for properties valued up to €2.1million. The basic rate for this ranges from 95c to €3,110.
The Irish Government sets rates centrally, but each local authority then can increase or decrease this by up to 15 per cent.
‘The UK system is one based on muddling through rather than a strategic process developed to fund the provision of local services in an effective and resource efficient manner,’ says Bryson.
‘The Irish case highlights that the UK does not need to impose a top-down expensive revaluation process.
‘All this will do will grow the civil service and lead to unnecessary costs that will then be reflected in the need to tax more.
‘The UK has so much to learn from Ireland, and it is important to note that the Irish government generates a surplus.’
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