Non-Domestic Rating (Rates Retention and Levy and Safety Net: Miscellaneous Amendments) Regulations 2026

Baroness Taylor of Stevenage Excerpts

Monday 23rd March 2026 Grand Committee

Moved by

[Baroness Taylor of Stevenage]

That the Grand Committee do consider the Non-Domestic Rating (Rates Retention and Levy and Safety Net: Miscellaneous Amendments) Regulations 2026.

[The Parliamentary Under-Secretary of State, Ministry of Housing, Communities and Local Government (Baroness Taylor of Stevenage) (Lab)]

The most exciting ones always come at the end.

As many noble Lords will know, the Government are embarking on a much-needed funding reform for English councils to ensure that resources are aligned with need across the sector, with the first multi-year settlement in a decade delivering that reform. The business rates retention system is a major part of the overall local government finance system under which English councils retain a share of the business rates they collect, as well as a portion of any growth in that income. Resetting the system is a key element of the wider reforms, ensuring that funding is better aligned with need while preserving the incentive for authorities to continue to drive local growth.

In parallel with these reforms, the Government are also implementing substantial changes to business rates tax policy, which I am sure noble Lords will agree is also an essential task. As a result, the Government must make technical updates to the business rates retention system to ensure that, as far as is practicable, local government funding is not impacted by these changes, which are outside the control of local councils.

The instrument before the Committee today will update the business rates retention system to factor in local government finance reform and to accommodate changes to the tax. It amends two key sets of regulations on which the rates retention system is run. The levy and safety net regulations establish the safety net through which authorities are protected from large drops in business rates income; they fund that protection by applying a levy to business rates growth. The rates retention regulations set out the fundamentals of how the system operates, including how business rates income is calculated and shared between central government, billing authorities and major precepting authorities. The amendments are technical but clear in purpose; I will explain them now.

The safety net and levy determine the balance of risk and reward in the business rates retention system. To ensure that this balance is appropriate through the multi-year settlement, the Government announced changes at the settlement; this instrument puts them in place. First, the level of safety net protection is being increased to 100% of baseline funding level or need, provided through rates income for 2026-27. This is something that local government has welcomed and which noble Lords will, I am sure, agree is sensible. Secondly, the levy on business rates growth will now operate on a marginal basis, with different rates applying as growth increases up to a maximum of 45%. This balances the reward of business rates growth with the need to fund safety net protections.

Moving on, in response to the reset and wider tax policy changes, we are making changes to ensure that grant compensation paid to councils in lieu of business rates is treated in the same way as the rates themselves, streamlining local government accounting.

Next, the instrument updates key formulae and figures that are used to run the rates retention system in order to reflect changes and updated values from the funding reforms delivered through this year’s settlement. This includes figures used to calculate different measures of local authority income for the year.

Finally, we are making a series of minor amendments that are aimed at reducing complexity across the system wherever possible, which noble Lords will, I am sure, value. These include disapplying provisions that are no longer required, future-proofing routine calculations and streamlining a number of small funding mechanisms.

These amending regulations make technical changes to the business rates retention system, putting into effect what is required due to funding reform and changes to business rates tax policy. If approved, they will ensure that councils receive the business rates income the system is designed to deliver. I beg to move.

[Baroness Pinnock (LD)]

My Lords, I draw the Grand Committee’s attention to my interest as a councillor on Kirklees Council.

This is a very technical measure and a bit of a mixed bag. The reset of the business rates retention system is long overdue and welcome. For too long, the distribution of resources has been based on figures from when the system was introduced in 2013, so recalculating each authority’s assessed need and business rate tax base to redistribute funding on a needs basis is welcome. Given that aim, it is surprising that the Government have not produced an impact assessment. The Explanatory Memorandum says within it that most authorities will find that the system works for them, but some will not, so an impact assessment would be very welcome to understand the winners and losers, and to what extent they are winning or losing. Can the Minister provide some basic impact assessment, not for all authorities but for those that will benefit most and least so that we can see how this will work in practice?

The safety net established in this SI is to be supported because, while any fundamental changes in the business rates system take place, it will enable local authorities to have stability in their known income. That is positive, but as far as I could see it is not explained how authorities already in a pooled system will be impacted, such as those in West Yorkshire. All the data provided is based not on a pool of authorities but on individual ones, so it would be helpful to understand how that works. The proposal for Section 31 grants is welcome, because it will also help remove the impact of volatility in the system.

The downside is, I guess, the move away from the whole purpose of the business rates retention system, when introduced 10 or 12 years ago, as an incentive for growth. The introduction of marginal tax rates—which is what they are—on growth that exceeds the limits could be viewed as a tax on success. That is somewhat at odds with the Government’s fundamental position that growth is everything. It does not seem to apply in this case. How far do they think that these marginal tax rates of 30% and 45% will encourage or discourage investment and growth in particular areas?

This is a mixed bag. The reset is necessary for fairness and a safety net is good for stability, but having worked figures would have been really helpful so that we could understand the consequences.

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At a time when we see unemployment increasing and growth flatlining, it is concerning that the Government’s approach appears to shift that balance decisively towards redistribution and against growth. The risk is that, in doing so, they weaken those very incentives that drive local economic activity and, hence, the Government’s objective of growth. I hope that the Minister can provide reassurance that this balance has been properly thought through and give assurance to councils across the country that want to do the right thing that they will be rewarded for doing so. I look forward to the Minister’s response.

[Baroness Taylor of Stevenage (Lab)]

My Lords, I am grateful for all those comments. It is absolutely important to get the balance right between incentivising growth and ensuring that areas needing it benefit.

Like the noble Lord, Lord Fuller, I took the decision to go into a pooling arrangement. I will cite my area as an example of the difficulty. These are figures from a few years back, because I am not involved with it now, clearly. Our collection of business rates was around £44 million, and we got about £2 million back. We need to make sure that we continue to incentivise the growth we want to see. I will cover in a bit more detail some of the points that noble Lords raised.

On the impact assessment that the noble Baroness, Lady Pinnock, raised, the changes made by the instrument will put in place reforms delivered via the local government finance settlement. More information on the impacts of the charges is included as part of that settlement. The instrument will put in place the technical figures and formulas relating to that. I add that because these are technical regulation amendments, policy officials in the department have undertaken extensive engagement to prepare for their implementation, including consultations and targeted technical engagement with sector representatives and specialists, to make sure the proposed amendments achieve the correct policy intent. I hope that answers the noble Baroness’s points on impact assessment.

I am grateful to the noble Lord, Lord Fuller, for his welcome for multi-year settlements. He and I both argued long and hard for that over the years, and I am very pleased that we have been able to deliver that.

The noble Baroness, Lady Pinnock, asked about local authorities being affected by the Government changing how they are compensated for business rates relief. Now that we are compensating for reliefs via Section 31 grants, based on data collected from the authorities themselves, they will receive pound-for-pound reimbursement. They will be compensated by the usual annual data collection process, based on their returns, and this mirrors the way compensation for reliefs via Section 31 grants currently operates. Previously, authorities were funded for most reliefs through a reduction to their tariff or an increase in their top-up. Given that these amounts remained fixed in real terms over time, they were expected to absorb some of the costs associated with certain reliefs. We think that this will actually be of benefit to local authorities.

Both the noble Baroness, Lady Pinnock, and the noble Lord, Lord Fuller, raised questions about the pooling method used. Transitional arrangements are in place to take local authorities, including those in pools, from current arrangements to their new arrangements, and this includes a measurement of the income they started from, including any income from pooling. Following consultation, we are making a change to better reflect income from business rates pooling, which is included in local authority transitional funding baselines.

The Government’s objective across this process has always been to make the best possible estimate of current local authority income. The revised method will still ensure that pooling gains are allocated across the locally pooled area. Within each pool, 50% of levy savings will be allocated between tariff authorities and 50% will be allocated between top-up authorities. The complexity and variety of pooling arrangements, which the Government are not directly involved in, mean that a central assumption is used to estimate pooling gains for this specific purpose. To help councils adjust for the change, the Government will provide a one-off adjustment support grant in 2026-27 to authorities that would otherwise see their core spending power reduce in 2026-27. The pooling assumptions for 2027-28 and 2028-29 will be subject to consultation at the next settlement. I have already started talking to local authorities about this.

I think all Peers who have spoken referred to the potential for growth disincentive. The business rates retention system was designed to be reset periodically to update the way it redistributes locally retained business rates between local authorities, which is a core aspect of the system. The reset will move business rates income, which is retained locally by local authorities, to where it is needed most, based on an updated assessment of need. Recalculating available business rates alongside a new assessment of funding need will ensure that business rates income is reallocated to meet changes in relative need, restoring the business rates retention system to its intended purpose of providing a responsive funding stream for local government while also rewarding authorities for business rates growth. Business rates growth can be realised. A proportionate levy will be applied to growth to ensure that income protections can be offered to local authorities. Of course, business rates growth generated within designated areas such as freeports, enterprise zones and investment zones will be exempt, in line with the current policy.

In setting levy rates, the Government are balancing the reward of business rates growth with the need to fund safety net protections. This will always be a balance. I think all noble Lords agreed that the reset was necessary. The approach we are taking will better support growth across the sector, with a lower percentage levy charge for early business rates growth in comparison with the current scheme, and the highest margin at a lower rate than the current 50% levy that many authorities are currently subject to.

To conclude, the technical amendments made by this instrument are necessary to ensure that the business rates retention system operates as intended for the coming year. I hope that the Committee will join me in supporting it.

Motion agreed.