Incomes are about to take a pounding
THE COST OF LIVING CRISIS WILL HIT US FROM ALL SIDES, WARNS HARVEY JONES
THE next 12 months are going to be tough as a string of price hikes and stealth taxes are set to ravage everybody’s spending power.
Here are some of the biggest changes, and how to reduce the impact on your pocket.
National Living Wage
In April, the National Living Wage for workers aged over 23 will increase to £9.50 per hour, lifting their income from £334.13 to £356.25 a week.
That will give millions an extra £22.12 a week, or £1,150 over a full year. It will increase their annual pay from £17,375 to £18,525.
Younger workers will get similar increases, with those aged 21 to 22 seeing their hourly pay rise from £8.36 to £9.18, for example.
Laura Suter, head of personal finance at AJ Bell, says the increases are hugely welcome right now.
“It’s an inflation-beating increase too, with those 23 and over getting a near 7% increase, while those ages 21 and 22 get nearly 10% more.”
Energy price cap
As gas and electricity prices go through the roof, the energy price cap will surely follow.
The cap limits the rates a supplier can charge for their default tariffs, and it was hiked by £139 to £1,277 from October 1 last year.
It will rise again from April, possibly by as much as £500, with the announcement due in February.
That would lift average tariffs to £1,777, with those on pre-payment meters paying even more. If you use more energy, or live in a large house, your bill may be even higher.
Council tax rates
Council tax bills are set to rise by an average 2.8% from April 1, according to the Institute for Fiscal Studies. The average Band D council tax bill in 2021/22 was £1,898, so that could lift them to around £1,951.
Laura Suter says how much more you pay will depend on your council, and some will hike bills by more than 2.8%. Council tax reduction, available to homeowners and tenants on low incomes or certain benefits, could cut bills to zero. Apply to your local council.
Rail fares
Commuters face the largest rail fare hike for almost a decade, a rise of 3.8%, based on July’s retail price index.
It will be introduced in March, instead of the usual January date, to give people a chance to renew their season tickets at the old price.
State pension
The state pension will increase by 3.1% from April 6, by which time inflation is likely to be twice as high at around 6%.
The ‘old’ basic state pension for those who retired before April 6, 2016 will rise by £4.25 to £141.85 per week, while the ‘new’ flat-rate state pension will rise by £5.55, from £179.60 to £185.15 a week.
The Government’s decision to abandon its state pension triple lock manifesto promise will plunge more pensioners into poverty, says campaigner Baroness Ros Altmann.
She called for emergency Government plans for the elderly, including a campaign to increase take-up of pension credit, a state pension top-up for the poorest, and higher heating benefits.
Income tax threshold freeze
In March Chancellor Rishi Sunak announced he was freezing income tax thresholds for five years. So, on April 6 the personal allowance will be frozen at today’s £12,570, while the higher-rate 40% allowance will be frozen at £50,270.
As a result, millions will either start paying tax for the first time or be pushed into the 40% tax bracket.
Someone earning £30,000 will pay £180 extra in tax than if the threshold had risen with inflation, assuming a 3% pay rise.
A £50,000 earner will pay £546 extra, with the same pay rise.
The next few years will see bigger increases as pay climbs but tax thresholds stay the same.
National Insurance increase
The Government could hardly have found a worse time to tackle the NHS and social care funding crisis by increasing National Insurance.
This will go up by 1.25% in a bid to raise £12bn a year. Employees will see NI jump from 12% to 13.25% on earnings between £9,568 and £50,270 a year, and from 2% to 3.25% on earnings above £50,270.
Someone with taxable earnings of £30,000 will see their NI bill jump from £2,451.84 to £2,707.24 – up £255.40 a year.
From April 2023, pensioners who have earnings in retirement will also pay the new health and social care levy of 1.25%.
Sarah Coles, senior personal finance ana- lyst at Hargreaves Lansdown, says you can cut your tax bill and boost your pension if your employer offers a salary sacrifice scheme, and will pay some of your salary straight into your pension.
“You don’t pay tax or NI on pension contributions, so the full value of the cut in salary goes into the scheme. You’ll get less in your pay packet but will get higher retirement income instead of handing over more to the taxman,” she says.
Other allowances frozen
Every year, people can take capital gains of up to £12,300 without paying any tax on them. That allowance has been frozen for five years. Laura advises spreading assets between spouses or civil partners. The £325,000 inheritance tax nil-rate threshold has been frozen until 2025/26, as has the main residence nil-rate band of £175,000. The pensions lifetime allowance – the maximum you can hold across all your pension schemes – will also be frozen at £1,073,100, with a punitive tax charge of 55% on money that exceeds it.
The tax-free Isa allowance has been frozen at £20,000, and the junior Isa allowance at £9,000.
Dividend tax
If you hold shares outside of a taxfree Stocks and Shares Isa, you will pay a higher rate of tax on the dividends from April.
The dividend tax rate increases by 1.25 percentage points, so for basic rate taxpayers it will rise from 7.5% to 8.75%. For higher rate taxpayers the rate goes from 32.5% to 33.75%. Hardest hit will be those who own their own company and draw down dividends as salary. Married couples and civil partners can shift income-producing assets into the name of the partner who pays the lower rate of tax. Otherwise save inside a tax-free Stocks and Shares Isa where possible.
Inheritance tax reporting rules
Grieving families may have a slightly lower paperwork burden when loved ones pass away, due to simplified inheritance tax reporting rules. This should spare 230,000 people the extra stress of submitting full accounts to HM Revenue & Customs when going through probate.
End to insurance “loyalty penalty”
People who automatically renew motor and home insurance policies every year were often punished rather than rewarded for their loyalty. From January 1, that situation has been addressed thanks to new rules by the Financial Conduct Authority.
When your insurer sends you a renewal quote, it must offer you the same deal that it would give to new customers. This is good news for those who are happy to stick with one insurer, but it may signal the end of cheaper deals for those who are willing to switch year after year.
VAT tax break ends
The VAT rate for hospitality and tourism was slashed to 5% to help struggling businesses during lockdown. This rose to 12.5% in October and will return to the normal 20% on April 1.
Sarah says: “There’s a risk this will prompt price rises in pubs and restaurants.”
Water bills to fall
One small consolation is that water bills are likely to fall slightly from April 1, as suppliers have been told to drop prices gradually until 2025.
No-fault divorce introduced
From April 6, this year a longawaited change allowing couples to divorce without blame and recrimination will kick in.
Instead, one or both partners must give notice of intention to divorce and then wait for six months for the process to take place.
Flat-fee charges banned on small workplace pensions
People who move jobs regularly can end up with a string of small workplace pension pots. If providers charge a flat fee, this could hoover up the entire value of the pot over time. From April 6, firms will be banned from charging flat fees on pensions worth less than £100.
Pension Wise nudge
From June 1, new rules will nudge people who are drawing retirement income for the first time to arrange an appointment with the free and impartial Pension Wise guidance service, run by government-funded Moneyhelper.org.
This should help people make better decisions and avoid scammers.
Old £20 and £50 notes withdrawn
Dig out those old notes and make sure you spend them by September 30. Thereafter they will no longer be legal tender.