They would go into Y1 because that is the way the system works, I'm afraid. A child who is five on 31st August would go into Y1. Rightly or wrongly the system is largely driven by age and is designed to ensure that the pupil enters Y13 (Upper Sixth) in the September following their seventeenth birthday. In other words, once the leaving age goes up to 18, the system is designed to ensure that pupils get their A-levels before they reach the end of their compulsory education.
Don't blame your local authority. They have very little choice in this. The Admissions Code (which has the force of law) says they must offer places to every child in the September following their fourth birthday assuming the parents apply. It gives parents the right to defer entry but says that the school must not hold the place open if parents choose to defer for a full year. This is broadly in line with the recommendations made by the review led by Sir Jim Rose under the last government. Having said that, some LAs will allow some pupils to enter Reception a year late if there is good evidence that this is in the child's best interests.
You have the absolute right to defer entry until later in the school year so you could, if you wish, apply for places now but not have your children start school until, say, Easter 2013. The right to defer entry is intended to help with the problems that affect some summer born children. I'm not saying it is the right solution and I am aware that some experts think this actually makes the situation worse but that is the only solution offered by the current system.
If your children were to go into Reception in 2013 they would be the oldest in the class and would be a year older than the youngest. However you design the system it is always going to be the case that the oldest in the class is about a year older than the youngest.
I don't know whether or not the current system is right and I am certainly not here to justify it, but I know and can explain how the system works and, in most cases, the thinking behind it. I understand where you are coming from and I sympathise. However, the best advice I can give is that you should apply now for places for your children to start in September 2012 then, when you have accepted the offer, inform the school that you intend to defer entry until Easter 2013. In parallel you can see if your LA may be willing to allow your children to enter Reception a year late but don't let that delay you applying for places - you need to get your application in by January 15th.