Interactive Investor

Living-cost pain for higher earners too

8th February 2022 15:18

Katie Binns from interactive investor

Tax hikes, energy bill rises and interest rates will impact the lowest-income households hardest - but higher earners will also feel the squeeze. Katie Binns suggests some ways for them to ease the pain.

Last week, the government reaffirmed that it would continue with the 1.25 percentage point rise in national insurance contributions (NICs) from April. This means higher-rate taxpayers earning £50,271 a year will pay £508 more in NICs, while someone earning £80,000 a year will pay £880 more. If you earn £100,000 you’ll pay £1,130 more.

Then energy regulator Ofgem raised the energy price cap a shocking 54% - taking the typical house’s annual bill from £1,277 to £1,977. However, if you use more energy, or live in a larger home than the “typical” three-bedroom semi-detached house on which the estimate is based, or live in a particularly draughty property, you could easily see your bill exceed £2,000.

The Bank of England doubling its interest rate to 0.5% is its second rate rise in seven weeks. Around two million borrowers are on variable rate deals of some kind, which means many of them have already seen a rise in their monthly payments since the last base-rate rise.

Thousands more borrowers are on fixed-rate deals that end soon. If this base rate increase is fully passed on to an average standard variable rate (SVR) mortgage, this could add more than £680 over two years on to someone’s payments, based on them having a £200,000 mortgage, according to data analyst Moneyfacts.

Rail fares will also go up in March, council tax rises from April will vary across the UK and frozen tax thresholds will see some people pay more tax. At the same time, prices are going up across the board, from petrol to food to services.

Meanwhile, borrowing on credit cards rose to its highest level in more than a year in November. Britons added £900 million to credit cards, taking total net borrowing that month to £1.2 billion, the highest level since lockdown eased in June 2020. 

It all adds up to a significant dent in higher-income household finances, even though they haven’t done anything different from usual. 

And while you wouldn’t expect higher-income households to qualify for government support, Citizens Advice has described its package of new initiatives as ‘strange, complicated and untargeted’. For example, the £150 council tax rebate announced to alleviate rising bills will only benefit homes in Bands A to D, ignoring 75% of properties in the south of England.

However, other than doing all the usual things to cut your energy consumption and scrapping a second holiday, there are steps you can take to mitigate price rises and build some financial resilience for what could be a tough couple of years ahead.

Be ready to switch your mortgage deal

As soon as your mortgage deal ends, you’re automatically put on your lender’s standard variable rate (SVR). Some households will be able to save around £200 a month - or almost £2,500 a year - just by making a straightforward switch.

For example, according to L&C Mortgages, a homeowner with a £150,000 20-year mortgage loan on a lender’s SVR of 4.49% will have a monthly repayment of £948.16. The same mortgage on a two-year fixed-rate remortgage deal of 1.34% will have a monthly repayment of £712.83. That’s a saving of £235.33 per month - or £5,647.92 over two years. Factoring in the arrangement fee of £999 still leaves a homeowner better off by £4,648.92 over the two-year period.

Ask for a pay rise

Go against Bank of England boss Andy Bailey’s comments and ask for a pay rise to cover the cost of living - especially if you haven’t had one in a while. Assume your employer or clients won’t say no to even a small increase. A small rise may not seem like much, but it will make a difference if you are in a couple and both your employers agree, or if you’re a freelancer or sole trader with several clients.

Invest to try to beat inflation

Companies with strong brands or essential goods, such as Apple and Microsoft, can increase their prices in line with costs. Funds that invest in such firms include Fundsmith Equity. Meanwhile, two bonds that will help investors counter the effect of inflation include Man GLG High Yield Opportunities (pays 5.5%) and Twentyfour Income Fund (also pays 5.5%). Talk of the middle-classes ‘buying down’ from their usual brands such as Waitrose to save money may mean the likes of B&M European Value Retail and Primark owner Associated British Foods are stock market winners this year. 

Include a serious low-spend period in your diary

Higher-income households may be unfamiliar with the idea of a systematic low-spend month. It involves cutting out all non-essential spending and tapping into cheap thrills (dog-walking, reading, game and film nights at home). This way you can quickly build a buffer to cover higher bills or get ahead of school fees. 

Cancel unused subscriptions

Do you really need multiple television or music streaming channels, those repeat orders on Amazon, magazine subscriptions, your gym membership and certain insurance policies? You’ll be amazed at how you can significantly trim your long-term expenditure by going through a bank statement.

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