Under current rules, about six million people either have all their council tax paid or are given some money towards it.
The rebate system is largely funded from central government, but the Coalition plans to cut funding by 10 per cent – saving the Treasury £500million a year.
Hilary Benn, the party’s local government spokesman, said this meant millions will face council tax hikes from next April.
Ministers are also telling local councils to decide which groups should benefit from the rebates, and which should not - meaning there will be a postcode lottery in the application of council tax benefit. Only rebates for the elderly will be protected.
On Friday, Labour-run Manchester Council launched a consultation over plans to reduce the rebates, so that all residents except pensioners face having to pay at least 15 per cent of their council tax burden
Tory-run Barnet Council, in London, has said working-age people could be charged up to 25 per cent.
And Eric Pickles’ local Essex County Council warned last week that ‘the changes to the council tax benefit system could have major implications for some of the most vulnerable members in our community’.
Mr Pickles is the Communities and Local Government Secretary who has been driving through cuts to council budgets.
For Labour, Mr Benn said reductions in the benefit would repeat the mistakes of the poll tax, when the lowest-income households were chased for cash they did not have.
‘Eric Pickles has lectured councillors that they have a moral duty not to increase council tax bills but in fact he has been planning a £450 million council tax bombshell of his own by increasing the bills paid by people on low incomes,’ he said.
‘Local authorities face a terrible dilemma. Do they increase council taxes on the working poor – over 760,000 people nationally work but have lower council tax because their income is low – or the disabled or families with young children?
‘Just as happened with the poll tax, councils will be forced to chase people on low incomes for money they simply don’t have.’
He added: ‘The Budget killed off David Cameron’s claim that we are all in this together, but to see tax cuts for millionaires and tax increases for those on low incomes planned to come in on the very same day next April tells us everything we need to know about whose side the Coalition is on.’