Cash in Lieu of Affordable Housing A pragmatic solution or a dangerous precedent?
Developers paying cash in lieu of building affordable homes is not new: commuted sums already form part of the planning system and are often used where on-site provision is impractical or would produce a worse outcome. However, a significant change in the recent draft NPPF is the suggestion that this route could become easier to use for medium-sized housing sites, rather than remaining something that is considered on a case-by-case basis.
The draft guidance itself still requires affordable housing to be delivered on site (allowing an off-site contribution or a cash payment only where that is robustly justified and where the objective of creating mixed and balanced communities is maintained). However, the consultation also asks whether medium developments - defined as schemes of 10 to 49 homes on sites of up to 2.5 hectares - should be able to discharge affordable housing requirements through a payment in lieu more readily. Essentially, if the current draft NPPF becomes policy, cash in lieu would apply more easily to a wider category of sites.
Medium-sized sites can suffer disproportionate disadvantages and this is reflected in the ever-declining SME housebuilder market. Analysis by the HBF (Planning for Small Sites) shows that in 2024, just over 17,000 homes were approved on sites of three to nine units, compared with around 35,000 in an average year during the 2000s. The share of plots on these sites has fallen from almost 20% in 2008 to 6-8% now, while average site size has climbed to just over 41 units per site.
Furthermore, a modest scheme can spend months in negotiation over a handful of affordable units, only to run into limited appetite from Registered Providers for taking very small numbers of homes in a particular location or tenure mix.
That is where cash in lieu becomes a practical solution. If a commuted sum can unlock a stalled scheme and if that money is then used to support affordable delivery more efficiently elsewhere, there is a strong argument for flexibility. It may also avoid the odd outcomes we sometimes see on medium sites, where a ‘token’ amount of on-site affordable housing is technically policy compliant but not especially coherent from a management or place-making perspective.
There is also a wider economic case. SME builders have been squeezed by rising costs, slower planning and the cumulative burden of regulation. If the government wishes to support SMEs, it must address the practical frictions that stop otherwise viable sites from coming forward – of which this is one.
That said, there are risks in moving too casually in this direction. Firstly, affordable housing provided on site is not only a number on a spreadsheet but is vital to the creation of mixed communities.
Secondly, a commuted sum only works if the LPA can turn money into homes. That requires land, delivery partners, officer resource and a clear pipeline. Without that, cash in lieu can become a deferral mechanism rather than a housing solution. As we have seen recently, Section 106 money may sit in council accounts for years while the promised affordable homes materialise slowly or not at all.
The third is valuation. If cash payments are to become more common, they will need to be calculated transparently and consistently. Otherwise, every negotiation risks becoming another argument about viability. The government is right to ask what guidance would be needed on this. A system that claims to simplify delivery will fail if it simply replaces one area of dispute with another.
From my point of view, the answer is not to reject the extension of cash in lieu, but to use it carefully. It should remain a targeted tool, not a universal escape hatch. The strongest case is on genuinely medium-sized sites where on-site provision would be awkward, delay delivery or fail to attract an RP partner. The case is much weaker where the effect would simply be to dilute mixed tenure communities or to shift burdens onto councils without a credible route to spending the receipts quickly.
If the government proceeds, safeguards must be put in place. The valuation method should be clear and standardised; receipts should be ringfenced and reported on transparently and there should be expectations on the pace at which authorities deploy the money.
Handled well, this proposal could help unlock a category of site that has become unnecessarily difficult to deliver while also providing the necessary affordable housing in the most suitable locations. Handled badly, it could weaken confidence in affordable housing policy while doing little to increase actual supply.