Inflation hit a new high of 6.2% when the Chancellor delivered his spring statement this week – a statement that has come under heavy criticism for failing to respond adequately to the intensification of the crisis. cost of living crisis.
Households were desperate for emergency help with their energy bills, such as turning the £200 support scheme into a grant – at least for those on the lowest incomes – but to their disappointment the Chancellor has completely ignored the problem.
What he has announced is an income tax cut ahead of the next general election – in 2024 – and an increase in the National Insurance (NI) threshold, which means fewer people will have to pay a 1.25 percentage point tax hike later this year.
But the reality is that wages are simply not growing at the same rate as daily consumer goods.
As alarming letters begin to arrive in our mailboxes telling us of massive increases, we’re answering some of your biggest questions about what it all means for you.
What is Inflation?
Inflation is the number used to explain how much the prices of basic necessities are rising.
In February it was 6.2%, meaning on average that’s how much more you’ll pay for goods and services now, compared to a year ago.
Why does this happen?
A “cost of living crisis” simply refers to the prices of things like energy, fuel and food rising faster than household income.
The current crisis began when demand for everything skyrocketed after the pandemic. It’s a “crisis” because costs are high across the board – on food, gas, and energy bills – rather than just one item in one area.
Some of the factors behind the current price spike include staff shortages, strong demand for oil and gas and uncertainty over supplies due to the conflict in Ukraine – although the cost of living crisis increased before the invasion.
What key points should I know from the spring statement?
In September the government announced that employees would pay an additional 1.25 pence in the pound of their wages in NI contributions from April.
But Chancellor Rishi Sunak has now raised the income threshold at which people start paying NI.
Currently, most workers start paying NI when their income reaches £9,568. They pay 12% of income between £9,568 and £50,270, then 2% on any income above £50,270.
But in a reversal, the Chancellor has said that from July NI will only have to be paid on income above £12,570 a year – the same level at which income tax begins to be paid.
In practice, this means that anyone earning less than around £35,000 a year will pay less NI over the course of the year. This represents approximately 70% of all workers. Those earning more than that will see a tax increase, albeit smaller than they expected.
For an employee earning £20,000 a year, that means an annual National Insurance cut of £180 in 2022-23, instead of the £89 increase expected before the announcement, according to accountancy firm Deloitte.
Early last year, Sunak said the thresholds at which income tax is paid would be frozen at April 2021 levels for five years. If enforced, it meant the wage increases would push millions more workers into higher tax brackets.
But he has now pledged to cut the basic rate of income tax by 1 pence per pound before Parliament ends in 2024.
The way income tax works is that you pay nothing on income up to £12,570 a year.
You then pay 20 pence on every pound you earn between £12,571 and £50,270 a year.
This is called the “basic rate” of income tax, and it is what Sunak reduces by 1p.
Sunak also reiterated a council tax refund of £150 which will be available to people in AD groups from April. He also said the £200 energy support scheme will continue as planned.
In a longer-term move, he said VAT would be reduced from 5% to 0% on energy efficiency products such as solar panels, insulation and heat pumps.
Addressing soaring car prices, he announced a 5p a liter cut in fuel tax for next year, mitigating some of the price rise – although average fuel bills have risen a further around 40 pence a liter over the past 12 months.
Motoring organization RAC said the move would cut the cost of filling a typical 55-litre family car by £3.30.
Local councils will also receive an additional £500m as part of the Household Support Fund, which supports vulnerable people with payments and grants such as vouchers to help them pay their bills – more on this below. below.
What happens with prices next month?
Price spike season is usually in April, when expenses like phone bills, council tax, energy prices, and essentials like prescriptions and stamps tend to spike.
April also marks the start of a new fiscal year, when the minimum wage, state pension, allowances and other annual increases come into effect.
The good news is that most people will earn a bit more pay, but the bad news is that it won’t increase with inflation, which means some of that extra money will be destroyed almost instantly.
If you are 23 or over, the National Living Wage will drop from £8.91 to £9.50 on April 1.
Is my energy bill going up?
Yes, most likely.
Indeed, a price cap on variable-rate energy bills, which 80% of the country has, increases by around 54% on April 1.
A house using an average amount of energy will pay £693 more per year.
When wholesale gas prices soared last year, almost all cheap fixed prices disappeared.
The remaining fixed rate rates were so expensive that households opted for variable rate offers instead.
Others ended up with variable rate rates because their current fixed rate contract expired.
Why did my energy supplier set up my direct debit?
If you pay for energy by direct debit and have a standard rate, the amount withdrawn from your bank account will most likely increase with the new cap rate.
But some customers have complained of premature and sometimes unjustified increases.
You may be able to challenge it.
Unless you’re on a flat rate, your bill is likely to go up – and there’s not much you can do about it.
But, if your energy company has told you that your direct debit deduction will be over 54% and you haven’t underpaid previous payments, then take action.
Take a meter reading and talk to your supplier. Remember that while your provider may change the amount of your direct debit, they must notify you in advance of any money taken from your account.
It should be around 10 working days to a month before the change.
Should I take a meter reading?
Yes. Even if you have a smart meter, the advice is to take and submit a meter reading by Thursday, March 31, before the new higher cap comes into effect.
This will ensure that any usage up to that point will be charged at the lower rate.
Should I buy energy in bulk?
Some prepaid households are being told that they could delay the price increase by purchasing their energy in advance.
This is NOT necessarily the case – so talk to your provider before charging more than your usual amount.
Can I benefit from a reduction on the residence tax?
First, to ensure you get the £150 council tax refund straight away, make sure you’re on a direct debit payment plan.
Second, you can get a discount.
If you live alone, you can benefit from a “single person discount” of 25%.
You may also qualify for a discount if you are under 18, an apprentice, a student, have funding from the Education and Skills Funding Agency, are nursing student or if you are seriously vulnerable.
You will receive a 50% reduction on your bill if everyone living in your household is “ignored” (in any of the above categories).
Council tax is usually billed over ten months, with two months free at the end of the term.
However, if money is tight, why not ask the board to spread the money over 12 months instead?
If you pay £1,200 a year, then over ten months you pay £120 a month.
But over 12 you pay £100, saving you £20 a month. That’s a sixth reduction in real terms every month.
And finally, some of the older homes may be in the wrong tax brackets (some of which are higher).
You can appeal and if you win, you will receive a lump sum in return. But if you lose, be prepared to be asked to pay back what you owe.
Will the Rishi Sunak Household Support Fund benefit me?
The Household Support Fund was set up last year to help people struggling with their bills or who might fall into a ‘vulnerable’ category. This week Rishi Sunak added a further £500m to the funding pot for it.
You apply for a subsidy from the fund at your town hall. The money is provided on a ‘discretionary’ basis, so it is not guaranteed.
You may find that you are offered vouchers instead of cash and some councils may not allow you to spend them on certain expenses.
The payments are designed to help those in need to make a dent in key bills like food and energy. Contact your local authority directly to see if you are eligible.