Work has started to upgrade the Uralla Water Treatment Plant, and hopefully put an end to the need to truck in bottled water for residents.

Elevated levels of arsenic were discovered in the town's water supply late last year, and since then bottled water has been supplied free of charge to local residents and businesses.

The upgrade plan involves replacing the sand in the water treatment plant's filtration system with Granular Activated Carbon to remove the inorganic arsenic compounds and pre-dosing the raw water entering the plant with ferric chloride to remove the organic arsenic compounds.

Significant rainfall during the month of February has also helped dilute the concentration of arsenic in the raw water supply at Kentucky Creek Dam.

"Preliminary testing indicates that the level of arsenic in the town water supply has been reduced below 0.01mg/L concentration, consistent with Australian Drinking Water Guidelines," Council's Acting General Manager David Aber said.

"Pending approval from NSW Health, we may be able to resume potable supply once the water moves through the full water system at the Treatment Plant."

The water treatment plant will continue to operate at Level 5 restriction production rates while the upgrade works are under way. And residents are able to use water in their gardens and wash their cars between 6pm and 7pm daily from Tuesday, March 3 to Tuesday, March 17.

"I appreciate the community's continued patience and am pleased to confirm the progress Council staff have made," Mr Aber said.

"If the current level of progress continues, I expect that the bottled water alert will be lifted and we can 'boot the bottle' within the next two weeks.

"We remain optimistic that the days of bottled water will be behind us."