One of Scotland’s biggest local authorities is investigating raising council tax despite Humza Yousaf’s pledge to freeze the levy – after officials revealed its stretched finances would be better off.

The First Minister stunned council umbrella group Cosla and his government partners, the Scottish Greens, when he announced at SNP conference in October that council tax will be frozen in the 2024-25 financial year.

The Scottish Government has allocated £144 million in its budget for next year to “fully fund” the council tax freeze, but council chiefs have warned this does not go far enough amid a warning it will lead to a further cut to local services.

Now, officials in Edinburgh have concluded that the authority would be better off raising council tax, especially as the city council’s share of the £144 million leaves it £1.4 million out of pocket.

The investigation raises the prospect of local authorities rejecting the Scottish Government’s council tax freeze and raising the charge for residents in the next financial year.

In a report to councillors on the authority's finance and resources committee, officials have highlighted the £144 million of funding allocated to “compensate authorities for income foregone as a result of a proposed council tax freeze in 2024/25”.

It adds: “While based upon a 5% assumed increase in rates, consistent with the uplift assumed…indicative allocations show Edinburgh’s share of this sum to fall short of current planning assumptions by £1.4 million.”

Officials have added that “beyond withholding of funding dependent on freezing council tax rates” by SNP ministers, “it is officers’ understanding that no specific penalties or sanctions would be applied in the event councils choose to raise these”.

Council officials have also calculated what raising council tax would give Edinburgh City Council amid its over-stretched budgets.

The report adds: “This means that each 1% actual increase in rates above 5% would result in additional net income relative to baseline assumptions of £3.5 million, as well as avoiding the £1.4 million shortfall in compensation noted above.

“A 6% increase would therefore generate additional net income of £4.9 million and a 10% increase £18.9 million.”

Labour leader of Edinburgh City Council, Cammy Day, told The Herald that “all options” are being looked at.

He said: “We didn’t support the council tax freeze in the first place because it does not help the poorest in our city.

“We would much rather invest that money to help people get out of poverty or to help contribute to our net zero targets which are 2030. It’s not something we want to do.”

Mr Day added: “However, given the desperate budget position we are in, it feels wrong not to accept a compensation for the council tax freeze which was announced with no knowledge of the officials in government, of Cosla or of even the Green party in government.

“Whilst we are hugely disappointed by that, we are, of course, looking at all options. The decision will be taken by the council at its budget meeting later in February.”

Council leaders from across Scotland will hold a crunch meeting on Friday to discuss the shortfall from the Scottish Government to offset the council tax freeze.

Mr Day insisted that the compensation offer “is not full funding for Edinburgh”, warning that it around £1.4 million short of what is needed.

West Dunbartonshire Council was planning to hike council tax by some 8% and Shetland was looking at a 10% increase.

Mr Day added: “These councils, along with us, are not getting fully funded.

“So whilst the notion of the public spin on it is there’s a council tax freeze, it’s effectively another cut to council services here in Edinburgh.”

The council leader has warned that “we’re having to look across every department of the council – that includes children and families, that includes culture and transport – to see where we might be able to save money”.

He added: “Alongside that, we’ve had notification that our bus partnership money has been ceased, our regeneration capital funding has been suspended and withdrawn, our green accelerator growth money which we had already allocated £10m to us was pulled from under our feet.

“It’s shameful what is happening from the government now and I only hope that in the final budget that they settle that my fellow MSPs from across Edinburgh will stand up for our city and fight for fair funding for Edinburgh.”

Liz Smith, Conservative shadow finance and local government secretary, said: “Humza Yousaf announced the council tax freeze to get a cheap cheer at SNP conference.

"He doesn’t seem to have consulted anyone, thought about how it would be paid for, or realised that it wasn’t even within his power.

“The SNP’s savage tax-and-axe budget made it clear that it was actually a further huge cut to council funding and essential services. It’s no surprise that Edinburgh, and no doubt many other councils, now think that this was yet another extravagant SNP promise that had no basis in reality.”

Deputy First Minister and Finance Secretary, Shona Robison, said: “In the face of a profoundly challenging financial situation, we are making available record funding of over £14 billion to councils – a real-terms increase of 4.3% on the previous year – should they agree to freeze council tax.

“The £144 million for the council tax freeze would be equivalent to an above-inflation 5% rise in council tax nationally.

“We recognise the crucial role councils play in their communities, which is why we have increased their overall share of the Scottish budget.”