More than £4bn could be raised to pay for adult social care in England by scrapping an outdated funding formula, the Local Government Association has said.

It claimed the Barnett Formula, used since 1979 to allocate public spending across the four UK nations, left England short-changed by £4.1bn because of a bias to Scotland, Wales and Northern Ireland.

The formula was intended to be temporary in the run-up to the abortive devolution referendums in the late 1970s, but has remained in use.

Barnett is based on population rather than need and has locked-in the proportionally higher spending per person used in Scotland and Wales 35 years ago, the LGA said.

It called for the £4.1bn to be returned to England for use as seed funding to establish a government-backed scheme for loans to help people pay for care in their old age. This would work in a similar way to student loans, with people able to borrow against their estate to pay for care.

Demand for councils’ adult social care services is increasing by 3 per cent each year, meaning councils have to find an extra £400m a year while their central funding is being cut by 43 per cent, equivalent to £20bn.

The LGA said this placed social services “under enormous strain” and led to service reductions and tighter eligibility criteria.

LGA chair Sir Merrick Cockell said: “The crisis engulfing adult social care demands a shift to a needs based formula for distributing funding.

“The government also has to take action to ensure people can plan with confidence for the financial needs of old age.

“A national care loans scheme would provide peace of mind to people and put financial sustainability into a system which is creaking at the edges.”

The LGA is working on proposals for an alternative funding allocation mechanism to replace the Barnett Formula, which it will publish next summer, and will press the political parties to include the introduction of a needs-based formula in their manifestos.