This year is going to be financially challenging for many. Inflation has exceeded 5% which is eroding the value of savings and reducing spending power and there are several increases in expenditure that everyone should be aware of.
Those of you who know me will already know that I am never a foreteller of doom and I always look for the positive, however we do have to be realistic and take heed of the changes so that we can adjust our financial expenditure and prepare. I can’t remember where I first heard this expression, but it has never been truer: ‘failing to plan is planning to fail’.
With regard to the financial changes taking place, you don’t have to look far because it seems to be a common theme when you search Google, and I quote Sarah Coles who wrote in The Daily Express on 3rd January: –
“Most of the financial developments in the pipeline will leave us worse off by the time we struggle to the end of 2022. The tax rises announced around the Budget will kick in, along with higher prices for everything from energy bills to rail fares and pub prices. 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.”
There’s another warning from Martin Lewis who wrote in The Independent: Martin Lewis warns soaring energy bills could force ‘eat or heat’ dilemma and the list is endless Warning every household will be over £1,000 worse off in 2022 – thanks to seven big financial blows says The Manchester Guardian.
Let’s start with a positive:
- Workers on the basic wage will receive a boost in April as the minimum wage rises to £9.50 an hour (there are lower rates if you are under the age of 23). This does not affect any of our clients because they have little enough to live on let alone to save and invest. I honestly don’t know how they manage, and I am sure that those in government who arrange business lunches for £1400 have no idea either.
- State pensions will increase by last September’s inflation figure of 3.1%, however remember that this figure was used after abandoning the triple lock which would have seen pensions increase by about 8%. With the consumer prices index at 5.1% an increase in state pension of only 3.1% is actually a 2% reduction. Don’t forget CPI (consumer price index) was adopted by the Conservative government in 2010 because they said it matched the calculation of inflation used by other EU countries. It was convenient because it is always lower than RPI (retail price index) which is currently running at 7.1%. Perhaps now that they have forced us to leave the EU, they could revert to RPI (pigs might!).
- Remember those days pre-Covid when we all travelled freely? Well, those of us that still travel by train need to be aware that fares will rise by 3.8% in March. In this case, the increase is based on last July’s Retail Prices Index (RPI), the measure of inflation which is used to calculate the rail rates each year. Why RPI? I think that you can work that out.
- National insurance rate rise: Employees, employers and the self-employed will all pay 1.25% more in National Insurance (NI) for every pound they earn from April 2022. This is a new NI tax rise that will come into force this year and be renamed as a health and social care tax from 2023. The average worker will pay an extra £255 a year in taxes. All working adults, including those over the state pension age, will have to pay it.
- Council tax rate increases: The Office for Budget Responsibility (OBR) said it expected the total amount raised in council tax to be a third higher in 2026/27 than it was in 2019/20. Last year, councils were able to push up bills by a huge 5%. This year, local authorities will be able to increase bills by a maximum of 3% without having to hold a local referendum, with 1% of this amount going to social care. However, any council that did not impose their 3% allowance last year, can roll it over to 2022. That means residents in 33 towns could see their bills rise by up to 6% in 2022. Increases of up to £500 a year will not be unusual.
- Energy Price Cap increases: The next energy price cap, due to come into effect in April, could increase by a further £280 and reflect a 500% surge in wholesale gas prices, the industry has warned. The price cap limits how much suppliers can charge the most vulnerable customers, but this year this restriction meant firms were unable to charge customers real time rates as gas prices soared – with the consequence that 28 suppliers went into administration. The next cap will be announced in February and introduced in on April 1. The announcement isn’t going to be pretty because it’s going to reflect far higher wholesale prices, plus the cost of the industry picking up the pieces following energy company failures.
- The TV licence will rise again next April, usually in line with inflation.
- Prescription charge changes: It is usual for prescription costs to rise in line with inflation each April – and the same is expected to happen this year. In addition, the government is also debating whether to change the rules on the age when you stop paying for prescriptions. At the moment there’s no charge for over 60s, but they could change it to apply to those over the state pension age, dragging millions of people into having to pay for essential medicines. Watch this space.
- Tax thresholds will remain frozen: Rishi Sunak announced last March that key thresholds would be frozen this April. This is a stealth tax because it means that over time, rises in wages and house prices will mean more people paying more tax, and more moving into the higher rate band. It’s a horrible stealth tax that will hit millions of people for years to come. The details on this are as follows:
- The personal allowance will remain at £12,570 in April, and every year until 2025/26.
- The higher rate threshold will be frozen at £50,270.
- The capital gains tax annual exempt amount remains at £12,300.
- The pension lifetime allowance is still £1,073,100.
- The inheritance tax nil rate band is £325,000, and the residential nil rate band £175,000.
- Plus, everything from ISA allowances to the annual gifting allowance, the high-income child benefit tax charge and the savings allowance remain the same.
- Local clean air zone charges: London’s Clean Air Zone, also known as the Ultra-Low Emission Zone (ULEZ) currently charges drivers of the most polluting vehicles £12.50 a day on top of any congestion charge fees.
- Manchester Clean Air Zone will come into force on May 30, 2022, and Bradford will introduce their own Clean Air Zones. Birmingham’s Clean Air Zone comes into force in June, charging drivers of older vehicles £8 a day to enter the city centre. Other CA Zones will be introduced for Greater Manchester, Bolton, Bury, Oldham, Rochdale, Salford, Stockport, Tameside, Trafford, Wigan Newcastle city centre, Sheffield, Bristol, Gateshead, and North Tyneside. So, if you thought that this only affected London drivers think again, and it doesn’t stop there:
- The First Zero Emission Zone will also be piloted in Oxford – charging all but electric vehicles who enter eight city centre streets. Oxford will pilot the scheme in February 2022 – charging all drivers that enter the city centre £2 to £10 from 7am until 7pm daily.
- State pension rule change for expats: From January 2022 there are changes that affect how state pensions are calculated for Brits intending to retire abroad. For many, this will mean a reduced state pension so if your dream was to retire to somewhere in the sun and enjoy the state pension that you have paid into for 40 years you had better take advice and consider what changes are likely.
- Finishing on a lighter note: Paper banknotes have been around in the UK since 1695 but since 2015 old-style paper notes have gradually been replaced with polymer alternatives, and the Bank of England said they will cease to be legal tender on September 30, 2022. If you are fortunate enough to have any old £20 or £50 notes lying around perhaps now is the time to deposit them at your bank. From October they will have as much value as toilet paper!
Your Savings and Investments
For this blog I have focussed on income and expenditure, but it would be incomplete if I didn’t briefly mention savings and investments.
With inflation running at 5% and savings in your bank account at 1% or less, it doesn’t take a calculator to work out that your savings are deteriorating at the rate of 4% a year. This would mean that if you have £10,000 in the bank then after 5 years the real value would become about £8000, and after 10 years it would fall in value to less than £7000!
We all should keep a cash buffer for emergencies and to cover up to six months expenditure but if you have any more saved for emergencies than that then you are losing money. However, one piece of good news is our recommended balanced portfolio of sustainable funds which has produced growth of about 70% over the last five years. This means that your sustainable investments have kept up with inflation and earned a little bit more on top. If you would like further information on sustainable investing, please get in touch.
So – be prepared for the big financial changes that 2022 will bring. They are happening and will impact everyone. As I said at the beginning of this piece, be prepared because otherwise, you could find you can’t keep up with the cost of living, which will doubtless impact millions of people.