A new report claims 2022 will be the ‘year of the squeeze’, with bills set to rocket by £1,200 for the average family. And while the majority of these increases cannot be avoided, there are steps you can take to cushion the blow.
Here’s what you need to know.
What did the report reveal about family finances in 2022?
According to a report by the Resolution Foundation, the average household will have to find an extra £1,200 to keep on top of bills next year. And that’s not all. The foundation also reveals that real wages will be no higher by Christmas 2022 than they are today.
In similarly bleak news, the report predicts inflation will hit 6% in spring. Should this happen, then this will be the highest rate in 29 years!
The report also highlights that energy bills will increase next year. It suggests that prices will rocket by £600 in 2022, due to higher wholesale costs and the need for a levy to cover further energy firm collapses. The foundation suggests that this increase will disproportionally hit families on low incomes. According to its research, the poorest households are set to spend 12% of their income on energy next year, compared with 8.5% in 2021.
Torsten Bell, chief executive of the Resolution Foundation, suggests the government should help families by taking a look at the current energy price cap. He explains, “Top of the government’s New Year resolutions should be addressing April’s energy bills hike, particularly for the poorest households who will be hardest hit by rising gas and electricity bills.”
Meanwhile, the report also outlines how the freeze on income tax thresholds, coupled with the 1.25% National Insurance hike, will cost the average household an extra £600 next year. For wealthier households, the extra burden could be as high as £750.
The Resolution Foundation also claims that real wages are set to be just 0.1% higher in a year’s time. Worryingly, it also says real wages will be £740 a year lower by 2024, compared to where they would have been had the UK’s pay growth continued at levels seen before the pandemic.
What other factors will impact family finances in 2022?
Aside from the National Insurance hike, freezing of income tax thresholds, higher energy prices and sluggish wage growth, families will also be expected to grapple with higher Council Tax bills next year, as well as a new tax on dividend income.
According to the Institute for Fiscal Studies, under current government spending plans, English Council Tax increases of 3.6% per year will be required for the next three years. The research institute suggests such hefty increases will be needed to ensure councils are able to fund the same level of services that they were providing prior to the pandemic.
Meanwhile, a long-lasting Council Tax freeze will end in Scotland next year. The current freeze, which has been in place since 2007, has meant Scottish households have traditionally faced a lower council tax burden than in other parts of the UK.
Aside from Council Tax, another tax hike is likely to put pressure on household finances next year. That’s because 2022 will see the tax on share dividend income rise by 1.25%.
How can households avoid soaring bills in 2022?
Sadly, a lot of the expected hikes in 2022 are unavoidable. However, the following three steps could help you to reduce the impact on your wallet.
1. Check your Council Tax band
While you won’t be able to avoid Council Tax hikes in 2022, if your home is in the wrong band, it’s possible you could still find yourself with a lower bill next year (and beyond).
Alternatively, you may also qualify for a reduced bill in 2022, based on your personal circumstances. For more on these two options, see our article on whether you can reduce your Council Tax.
2. Avoid the 1.25% dividend tax hike
The 1.25% hike on share dividend income next year means basic rate taxpayers will pay 8.75% dividend tax in 2022, on any income above the tax-free threshold. Higher rate taxpayers will pay 33.75%.
However, there are ways to avoid this by investing in a tax-efficient manner. See our article that explains how to avoid the 1.25% share dividend tax.
3. Don’t fix your energy bill
A number of energy providers have come under fire recently. That’s because some have offered customers the chance to fix at a rate higher than the current energy price cap. The current cap limits what suppliers can charge customers on their Standard Variable Tariff. As a result, it’s almost certainly better not to fix for the time being.
Keen for more money-saving tips? See The Motley Fool’s latest personal finance articles.
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice.
The post Cost of living crisis: how to avoid your bills soaring by £1,200 in 2022 appeared first on The Motley Fool UK.
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