Residents in a Westcountry district say they have been "kicked in the teeth" by a council which has rejected an option to freeze council tax in favour of a rise.

South Hams District Council yesterday became the first in Devon and Cornwall to refuse the Government's offer of a one-off payment for authorities who agree to freeze tax levels.

Whitehall had offered each council the equivalent of a 2.5 per cent increase – a figure of £129,000 for SHDC.

Yesterday, Local Government Minister Bob Neill said the move was a "cynical" ploy to avoid a referendum next year which would be triggered by a council tax rise of more than 3.5 per cent next year.

"Turning down our £129,102 grant which allows South Hams to freeze council tax is enough of a kick in the teeth at a time when residents deserve a cost of living break. It's a cynical move that is simply treating the local electorate with contempt. The council can expect voters to show their displeasure at the ballot box."

Most authorities in Devon and Cornwall have indicated they will accept the offer and freeze the tax, despite a difficult climate in which overall funding is being significantly reduced. But yesterday, the Conservative-led authority chose to reject the incentive and instead increase the levy by 2.5 per cent.

Leaders said the one-off nature of the payment would have created a "black hole" in funding in future years, which would have led to hefty tax increases or service cuts.

The rise amounts to an extra £3.36 a year for the average band D property. At the moment, such a household pays £134.52 each month – the third lowest rate in Devon.

But Keith Baldry, leader of the Lib Dem group on the council, said the rise was "just wrong". He said: "It doesn't make sense. Very few people will have seen an increase like this in their income over the past year. It's just wrong. South Hams and their Siamese twin West Devon are the only ones not to be freezing council tax."

The two authorities share a range of services to cut costs. West Devon Borough Council is also expected to increase council tax by 2.5 per cent at a meeting on February 23.

Yesterday, SHDC leader John Tucker said the decision was "difficult". But he said it would place the authority in a good position to avoid cuts and sharp tax rises the following year. He said he was "broadly in line" with what residents want. "They do seem to want frontline services maintained," he said. "We recognise that our decision will affect our communities, particularly vulnerable people. But anyone struggling to pay their council tax can call the council and we will help them as much as we can."

Matthew Sinclair, director of the TaxPayers' Alliance, said residents in the South Hams had been "let down" by the increase. He said: "Over the last ten years there has been a drastic increase in rates and, with so many other pressures on their finances, this is the last thing families need. The council should follow the example of other local authorities who have shown it is possible to combine quality services with lower bills, and deliver much better value for money."