‘April set to be cruellest month in decades’ for household finances

A National Insurance hike and a new bumper energy price cap have conspired to create a perfect storm. We suggest seven steps to mitigate the worst of the impact from the rising cost of living.

Key points:

• The energy price cap will increase from 1 April for approximately 22 million customers.
• Those on default tariffs paying by direct debit will see an increase of £693 from £1,277 to £1,971 per year (difference due to rounding). 
• Prepayment customers will see an increase of £708 from £1,309 to £2,017. 

Commenting on today’s energy price cap rise, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “After a winter of discontent, April is set to be the cruellest month in decades for household finances. Creeping inflation, a national insurance hike and a new bumper energy price cap have conspired to create a perfect storm – and a financial headache for many. Even those not scraping by with skin-of -the-teeth survival will now be on red alert as interest rates creep up.

“No one is immune to the cost-of-living squeeze, but it will feel like a stranglehold for the poorest households, which already struggle to make ends meet.

“On top of losing the £20 uplift to universal credit, the rising cost of living has obliterated the modest increase to benefits. This imbalance between the rate of inflation and the uprating of benefits is set to worsen in spring, with the Bank of England predicting inflation could peak close to 6%, while energy bills are set to rise by as much as 50%.

“Many middle-income households will also struggle with the extent of the increase to bills that they’re going to see. The financial burden is compounded for those who have made the transition from home to office work in recent weeks, with the return of commuting adding to the financial load.

“Rocketing prices may not come back down any time soon, so it remains important to pay extra attention to your financial well-being and consider what protective steps you can take now to avoid money worries later.”

Myron Jobson outlines steps to mitigate the worst of the impact from the rising cost in living.

1. Beat the National Insurance rise

National Insurance is set to increase from April, putting further strain on incomes with workers set to pay 1.25p more in the pound from their wages. The increase will hit the take-home pay of millions in the UK, resulting in an employee on £20,000 a year paying an extra £130, while someone on £50,000 will pay £505 more.

The change has increased the allure of employment salary sacrifice schemes, as they can be used to offset the forthcoming rise. This arrangement allows employers to reduce employees’ salary and pay the equivalent amount into a non-cash benefit such as pension contributions and a cycle-to-work scheme. These benefits reduce the NI payable by the employee as well as the employer.

However, a lower salary can affect entitlements such as maternity/paternity pay, mortgage applications based on one’s income and some state allowances. As such, people should always consider how such benefits could impact their finances more broadly.

2. Review your spending

Evaluate your expenditure and look for ways to reduce spending. For many households, hikes in the cost of food and fuel are most noticeable when prices increase. It’s important to note that inflation hasn’t hit all types of food evenly. Prices of favourite snacks such as crisps and soft drinks are among the biggest risers in recent history.

Even simple things such as opting to purchase a store-brand equivalent of traditional larder products can help to cut down the cost of groceries. If you’re anything like me and find it impossible to distinguish between store brand and premium brand rice, opting for the cheaper version can help save on cost, without compromising on flavour.

3. Work out your inflation number

If you don’t use a budget to manage your spending, it’s difficult to know where you stand. Everyone has their own inflation number – it’s worth keeping a spreadsheet of your own spending habits so you can get a better idea of the goods and services that are eating most into your budget, and where you could cut back. If you don’t have a budget, now is a good time to start one. Inflation is hitting everyone, but low-income households living on a tight budget with little room to spare are feeling the pinch even more.

4. Get support if needed

Those struggling with debt do not have to suffer in silence – there is support out there. They should act swiftly and contact their creditors for more support. It is worth consulting a debt advice charity such as StepChange or Turn2Us and they will go through all your options.

5. Review your savings

Some of those people who became accidental savers during the pandemic, by keeping jobs while facing fewer outgoings during the Covid lockdown, may need to use some of the cash to tide them over during the cost-of-living crisis. Those considering locking their cash into a fixed-rate fixed-term deal for a better rate of interest should consider whether they’d need to access some of that cash if the cost of living continues to grow.

While the high rate of inflation means that most people’s savings are effectively losing value, it still pays to shop around for the best deal.

6. Fix your mortgage

Mortgages become more expensive when the base rate rises. The 850,000 UK mortgage holders on a variable rate deal will feel the immediate effect of higher interest rates as their rate is linked to the Bank of England’s base rate. For those on a fixed-rate mortgage deal, new interest rates don’t apply until the end of their fixed period.

Mortgage rates are still low compared to yesteryear, and there are still many competitive deals in the market. Anyone looking to buy or remortgage in the near future should consider securing a deal now. Mortgage deals are often valid for a number of months, and it is not too early to start looking for the best deals now.

For some homeowners, funnelling some of their savings to overpay on their mortgage is a no-brainer and a great way of saving a substantial amount in interest. There are limits on how much you can overpay and there might also be charges, so you should check with your mortgage provider first.

7. Avoid the temptation of Buy Now Pay Later (BNPL) schemes

The increase in the cost-of-living risks even more people turning to BNPL schemes to help tide them over. You can now buy essential groceries through some BNPL services.

“Worryingly, many people are still unaware that BNPL schemes are a form of credit. Recent research by Which? found most users admitted to skim-reading the T&Cs or simply ticked a box to say they had read them. Customers can be referred to debt collectors and their credit scores could be tarnished if they miss payments.

While it might be tempting to delay payment – and BNPL adverts can be very enticing and sometimes misleading - it can be a slippery slope into debt.”

It is also worth mentioning that relying on your credit card to get by may store up trouble for the future.