The "premium funding allocations", which pay top colleges an extra 1 per cent of budget, will be scrapped. Instead a Beacon Award with more cash will go to colleges showing significant improvements.
The LSC agrees with colleges which say the existing scheme favours small, well-heeled colleges over large metropolitan ones and is "divisive and unhelpful".
Measures aimed at meeting rising costs are spelled out in a letter to colleges from LSC chief executive Mark Haysom.
There is an extra pound;115 million this year, following the grant letter from the Department for Education and Skills last November. The council has diverted pound;160m for non-teaching to mainstream college provision and the DfES will "underwrite" an extra pound;64m the LSC needs to avoid swingeing cuts in adult learning.
But Rob Wye, LSC director of strategy, warns it will still be a tough year.
"More money has been announced but colleges are under great pressure because of record growth in student numbers."
Cash for costs will rise 5 per cent but colleges are expected to increase fees by 10 per cent to release cash for 16 to 19-year-olds, apprenticeships and the adult level 2 (GCSE-equivalent) learning entitlement. Money will also be taken from colleges where take-up misses the target.
This appears to have balanced the books, but at the cost of longer-term planning. Mr Haysom says: "While the position for 2005-06 is relatively clear there is a significant uncertainty over funding arrangements for 2006-07 and beyond."
John Brennan, chief executive of the Association of Colleges, said: "We regret that the three-year planning is now held in abeyance, having adopted it so recently."
However, there was much that colleges would view positively, he said. These included extra cash, and guaranteed funding for 16 to 19-year-old students, while holding the line on adult learning. There would be a 2.5 per cent growth in real terms and a very cautious strategy on the movement towards fees.
"That the council has looked to maintain stability rather than going for radical changes is in itself a good thing," he said.