Out-of-work residents could be forced to use their benefits to pay council tax because of a £1.04 million funding gap.
The shortfall will hit North Kesteven District Council (NKDC), thanks to the Government's welfare reforms.
To bridge the gap, the authority has come up with a drastic proposal which would see those who claim full benefits paying 25 per cent of their council tax.
It would affect around 3,000 homes across the district with the average claimant being forced to fork out an extra £240 per year.
In a further shake-up, anyone claiming less than £4 per week or who has more than £8,000 in savings, may not receive any council tax benefits.
However, NKDC has said that disabled residents, carers, pensioners and those receiving war pensions will have their council tax benefits protected.
It is also proposed to increase council tax on empty properties to claw back some cash.
A final decision on the scheme is expected to be made in January and would come into effect in April.
Andrew Everard, NKDC's welfare reform project manager, explained that the council could not retain its current benefits system with the resources available.
He said: "We just can't fund what we've been funding in the past.
"The result is that for working-aged people, who claim help towards their council tax, it has been proposed that the maximum they will receive is 75 per cent.
"Pensioners are protected – and the district council has also taken the decision to extend this protection to carers, the disabled and war pensioners because we know this will hit them hard. If this is going to affect people in a bad way, it's important that they let us know."
As well as the out-of-work, lone parents, sick people and those on low incomes will be affected.
NKDC will be writing to all people affected by the changes, as well as landlords and housing providers.
Stephen Phillips, Tory MP for Sleaford and North Hykeham, defended his party's welfare reforms and told the Echo he hoped everyone in his constituency would be involved in the district council's consultations.
He said: "There is no escaping the fact that the country has to live within its means.
"The Government's agenda of developing power to local people, which I fully support, means that we must all get involved in taking difficult decisions about how public funds are to be spent."