The cost of living crisis is getting worse, here's what to do about it

Nicole Garcia Merida looks at ways to lessen the effects of the cost of living crisis.

Inflation in the UK is running at 6.2% a year (if you use the consumer price index – CPI), or as much as 8.3% (judged by the old retail price index-based measure that used to form the basis of the Bank of England’s inflation target). Unfortunately, this month the cost of living squeeze is only set to get worse. Here’s what’s changing – and what you can do to lessen the impact.

The deep freeze on allowances

The personal allowance (the level of earnings at which you start paying income tax) will be held at £12,570 until 2026, while the higher-rate income tax threshold will be frozen at £50,270. This is “probably the biggest change coming in from 6 April”, says AJ Bell. Usually these thresholds would increase in line with inflation “to offer some protection to taxpayers”, but it’s proved an irresistible stealth tax for
the chancellor.

Similarly, on the asset taxation front, the capital gains tax (CGT) allowance remains frozen at £12,300 until 2026, while the inheritance tax threshold is also staying at £325,000, which will “start to bite into estates” that grow in value over the next four years. While the chancellor did announce plans to cut income tax from 20% to 19%, this is little comfort as it’s not due until 2024.

The health and social care levy

The threshold at which national insurance (NI) starts to be paid will rise to £9,880 from £9,568 in April, and then to £12,570 (matching the personal allowance) in July. But from 6 April most workers will also start to pay the health and social care levy, which is an increase of 1.25 percentage points on NI contributions, driving rates from 12% on earnings up to £50,270 and 2% on anything above that to 13.25% and 3.25% respectively. Taking the changes to the NI threshold from July into account, a worker on £30,000 will be better off overall, paying £2,309 a year in NI contributions, down £143 from the current £2,452.

However, someone earning £50,000 will pay £4,959, up £107 from their current contribution of £4,852.

Investors should note that dividend tax is rising along with the NI increase, which means basic-rate taxpayers pay 8.75% on dividend income; higher-rate taxpayers 33.75%; and additional rate 39.35%.

State pensions and energy prices

Households already struggling with rising costs will also have to deal with an increase in the energy price cap, which is a regulatory cap on the amount per unit of gas and electricity that utility companies can charge. Based on average household usage, it is rising by an eye-watering 54%, from £1,277 to £1,971 from 1 April, although of course that will vary depending on your individual usage.

The regulator is playing catch-up with soaring energy prices, and there’s no guarantee that October (the next time the price cap changes) won’t see another significant increase.

As for pensions, the state pension will rise with the rate of inflation (as measured by CPI), but that’s based on the figure from September 2021, which means an increase of just 3.1%. Meanwhile, the pensions lifetime allowance (LTA) – the total pension pot you can accumulate over a lifetime before being taxed at 55% on the excess – will be frozen at £1,073,100 for another four years.

Practical solutions

There are few government measures to help, although do check your council tax band – houses in bands A to D in England will get a £150 rebate on their council tax bills in April. If you pay by direct debit, this will be paid into your account directly. Otherwise, contact your council. Also ensure you use your individual savings account and pension allowances this year – at least those shield you from CGT and dividend taxes.

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