The new National Living Wage (NLW), which is introduced this week, could cost councils an extra £330m a year and threaten social care services, the Local Government Association (LGA) has said.
From 1 April the minimum wage of £6.70 per hour will see a 50p increase for workers over 25.
But the Local Government Association said the increased wage costs will put a strain on services for elderly and disabled people and fears providers may go bust or pull out of the market.
The association said councils did support the new NLW but said it could lead to a care provider crisis unless new funding is provided.
“Councils have already had to close a £5 billion funding gap in social care since 2010 and are continuing to struggle with major ongoing pressures,” said the LGA.
While the LGA has estimated it could cost councils a minimum of £330 million in 2016-17 to cover increased contract costs the association believes the true cost could be much higher.
Council tax rises to increase funding specifically for social care are expected to raise around £372 million in 2016/17. But according to the LGA all of this extra money will go towards covering the cost of the NLW.
To help councils meet the increased wage costs the LGA is calling on the UK government to bring forward £700 million of Better Care Fund cash earmarked for social care. At present this funding is expected to be allocated at the end of the decade.
The LGA is also planning urgent talks with care providers because of concerns the wage increases will see care providers pulling out of the market or going bust.
Councillor Izzi Seccombe, community wellbeing spokeswoman at the LGA and the leader of Warwickshire County Council, said: “There is a real risk that councils will struggle to cover the increased contract costs to care providers as a result of the NLW.
“A lack of funding is already leading to providers pulling out of the publicly-funded care market and shifting their attention towards people who are able to fully fund their own care.”
In August 2015, the UK's five largest care home providers warned the government a major provider could collapse within two years due to the council funding gap and the introduction of the NLW.