Lenders urged to brace for increased borrower arrears ahead of council tax rises

Target Group is warning lenders to brace for increased borrower arrears ahead of proposed local authority funding reforms – which could drive council tax increases of over 25% in parts of London and the South East.

Last month Angela Rayner set out plans for a “progressive” redistribution of local authority funding. The government’s “fair funding review,” led by Rayner, the deputy prime minister, aims to redirect funding to areas with greater needs, primarily in northern England.  

This could slash government grants for wealthier councils, with eight London boroughs – including Camden, Hammersmith & Fulham, and Wandsworth — facing significant shortfalls.

One council has said it faced a £30.1 million shortfall in 2028-29 highlighting that a 1% increase in council tax would raise £1.1 million – meaning it would have to raise taxes by 27.4% to cover the cost. 

While council tax can only be raised by 5% without a local referendum, the government does give special permission to a number of authorities every year to increase it further without consulting residents.

Melanie Spencer, growth director at Target Group, part of Tech Mahindra, said: “It’s early days but if these reforms proceed as planned, some boroughs could lose more than 70% of their current government grant. Lenders should be deeply concerned the government’s proposals could leave local authorities in the position of having to ramp up council taxes by more than a quarter. Borrowers in those local authorities won’t have budgeted for this. And this could well be the thin end of the wedge. If councils across the south east and south west of the country start having to put up council tax by more than 25%, borrowers in those areas are going to find themselves very stretched.

“We are calling on lenders to ensure their collections teams are in good enough shape to be able to handle a potential surge in arrears. Lenders need to focus on using data intelligently to identify borrowers who may be starting to struggle and early engagement with people who have started to slip into arrears. The cost-of-living crisis is far from over and the support lenders offer will need to be targeted and timely. Lenders will need the right systems in place to manage processes proactively. Early contact and remediation are key to keeping repossession a last resort and achieving better outcomes for borrowers and lenders alike. That requires investment in systems.”