Inflation and tax increases are causing the greatest squeeze on household finances in over a decade.
As fuel prices and energy rose, late 2021 witnessed prices rise. At 5.1%, inflation was high and it is expected to rise to 6.1% this year.
Retired people face a difficult year as the state pension will only rise 3.1 per cent, while many will have pensions that don’t keep pace with inflation.
As fuel prices and energy rose, late 2021 witnessed prices rise. The inflation rate was 5.1% in 2021 and will rise to 6.1% by 2020.
Also, the Bank of England will likely continue to raise its base rate. This means that mortgages for millions of people will become more costly. Yet, at the same time, interest rates paid on savings are still pitifully low — leaving nest eggs savaged by inflation.
Charity The Resolution Foundation warns that 2022 will be the ‘Year of the Big Squeeze’ with families expected to take a £1,200 annual hit on income from April.
Everyone will suffer. Rising bills will hit families with lower incomes, which spend more on energy than their salaries, the hardest. Tax hikes will affect wealthier households.
Sarah Coles, senior personal finance analyst at investment service Hargreaves Lansdown, insists: ‘2022 is a year of change — but not in a good way.
Many of the financial developments that are in our pipeline will make us poorer by the time next year ends.
‘It’s not all bad news though. Some positives hidden in the rising price are the removal of the loyalty penalty to insurance customers and lower water bills. Also, the administration burden is reduced for family members of deceased relatives.
‘Unfortunately, for most of us the bad outweighs the good so we need to plan ahead and be prepared for the worst 2022 can throw at us.’
Here, Money Mail sets out the dates on which you’ll start to feel the pinch…
Neue year, New rules
When you get a renewal offer for home or auto insurance, your insurer must give you the exact same deal as new customers.
Insurance companies used to offer better terms to attract new customers. However, loyal policyholders had to pay higher premiums every year.
This is great news for people who stay with one insurer every year, but it could mean that there are no more very affordable deals available for smart switchers.
City watchdog the Financial Conduct Authority says six million loyal car and home insurance policyholders would have saved £1.2 billion in 2018 if they had paid the average price for their policies — amounting to £200 each.
The New Year also brings about a tweak to the rules which will mean there is less paperwork for thousands of people with no inheritance tax to pay — sparing 230,000 of us extra admin.
Threat to interest rates
When the Bank of England’s monetary policy committee meets in February the base rate could rise again — sending the cost of borrowing up for millions.
Rate hikes: The Bank of England’s monetary policy committee is to meet in February , at which point the base rate could rise again – sending the cost of borrowing up for millions
The rate was increased from 0.1% to 0.25 percent this month. Experts believe that mortgage and credit card interest rates could rise, but banks will be less inclined to transfer rate increases to savers.
If the base rate rises to 1 per cent, borrowers with a typical £150,000, 25-year mortgage, on a standard variable rate of 3.59 per cent, would pay an extra £75 a month, or £900 a year, according to broker L&C. Those with £450,000 loans will pay £2,688 a year more.
Rail fares’ 3.8% hike
The train companies will raise the price of tickets by 3.8% starting March 1.
This will add £149 to the cost of an annual season ticket from Guildford to London and £215 to a Milton Keynes to London fare.
March also marks the expiration of the 12.5 percent VAT rate on hospitality and tourism. The result could cause price hikes at restaurants and bars.
To boil the bills
On February 4, energy watchdog Ofgem announced its new price limit. Analysts Cornwall In-sight have predicted the £1,277 cap will increase to £1,865 on April 1 as the cost of wholesale gas keeps rising.
This cap determines the maximum price providers will charge for standard variable tariffs, per kilowatt.
On this basis, the average household currently pays £1,277 a year but the actual amount depends on how much energy you use and how you pay.
Rising bills: Analysts Cornwall In-sight have predicted the £1,277 price cap will rise to £1,865 on April 1 as the cost of wholesale gas keeps rising
The cap for prepayment meters is £1,309.
The Resolution Foundation’s Labour Market Outlook estimates a typical energy bill could rise by as much as £600 a year.
There is still hope, however. Water firms are ordered to reduce prices slowly starting April 1, and continuing until 2025.
April tax trauma
Due to the Health and Social Care levies, workers will see a 1.25 percentage reduction in their earnings. It starts April.
The hike, which applies to England, Scotland, Wales and Northern Ireland, means you will pay National Insurance at 13.25 per cent on earnings between £9,880 and £50,270 and 3.25 per cent on earnings above.
Someone on a salary of £20,000 will pay £130.40 extra, while at £40,000 it’s £380.40. On £60,000 you’ll pay an extra £630.40, say accountants Deloitte.
People over age 65 and still employed will not need to pay this new tax until April 2023.
Also, rising wages will result in a tax freeze. Currently income tax kicks in on earnings above £12,570 — anything you earn under that amount is tax free.
You will then be subject to 20 percent income taxes on your earnings. The higher-rate threshold is £50,270 — and you pay 40 per cent income tax on earnings above this amount.
The income tax bands will be at the same levels as before April 2026. That means that inflation is not going to affect your wages.
Income grab: The new 1.25% Health and Social Care levy means someone on a salary of £20,000 will pay £130.40 extra annual tax while at £40,000 it’s £380.40
Get ready for spring
In April, council tax increases are expected. According to the Institute for Fiscal Studies, a 3.6% increase per year will be required for the next three-years in order for town halls and services to continue operating at their pre-pandemic level.
This would add an extra £68 a year to the average Band D property bill of £1,898.
The freeze on increases in council taxes will end in Scotland. This will allow local authorities to freely charge whatever they want for the first time since 2007.
A further 1.25 percentage point will be added to the dividend tax on shares income.
The tax is paid on dividend income above the £2,000 allowance. It will rise from 7.5 per cent to 8.75 per cent for basic rate taxpayers, while higher-rate taxpayers will pay 33.75 per cent.
Pay rise pittance
Because the rise in state pensions of just 3.1% is below inflation, UK pensioners will feel the pinch starting April.
The Government suspended the ‘triple lock’ guarantee for a year after the pandemic distorted wage inflation which stood at 8.3 per cent.
The ‘old’ basic state pension goes up by £4.25 a week to £141.85 while the new flat-rate state pension rises £5.55 a week to £185.15.
The decision to ignore the earnings link of 8.3 per cent will cost those on the new flat-rate pension £486.20 this year — or £9.35 a week.
Under the triple lock it would have risen to £194.50 a week or £10,114 a year.
Pay attention to the deadline
Finally, from September 30 old £20 and £50 notes will no longer be legal tender. You should allow yourself plenty of time before you need to use them.