As we start 2023, most people will be hoping for a better year than the one we’ve just had. With inflation exceeding 11% in October, mortgage rates spiralling after the disastrous mini-budget, and soaring energy costs as a result of the war in Ukraine, many will want to forget 2022.
But will this year be any better? While it is unlikely that many households will be approaching the coming 12 months with much optimism, at least they will be able to predict some of the stresses on their budgets.
Death and …
… taxes. There are few certainties in such a volatile world, but bigger tax bills are one that can be relied upon.
In his November autumn statement, chancellor Jeremy Hunt announced freezes on allowances and thresholds for income tax. This means that as people earn more, an increasing number will be paying more to the exchequer, while the cost of living is increasing at a greater rate.
Sarah Coles, personal finance analyst at investment firm Hargreaves Lansdown, says that with wage inflation at 6%, more people are either being pushed into a higher tax bracket, or paying tax for the first time.
“The Office for Budget Responsibility says that by the end of the freeze, 3.2 million more people will pay income tax, and 2.6 million more the higher rate. At the same time, because wage rises aren’t keeping pace with inflation, it means more tax coming out of a pay packet that’s worth less in real terms to start with.”
Council tax could also rise significantly, with local authorities allowed to increase it by 5% without a referendum, prompting suggestions that the average Band D council tax could go over £2,000.
Both the dividend tax and capital gains tax allowances will also be halved, hitting investors who hold money outside a pension or an Isa. “This rise is a stark reminder of the value of Isas in protecting investors from having to consider CGT or dividend tax, so anyone who hasn’t exploited their Isa allowance may be inspired to do so,” says Coles.
More energy bills
As the war in Ukraine continues, the effect on energy bills has been unprecedented. Ofgem says the price cap will reach the equivalent of £4,279 a year for the average household from January, a £730 hike for the first three months. However, the government’s energy price guarantee (EPG) limits the typical actual bill in Great Britain to £2,500 in the same period.
From April, however, it is expected that the EPG will be lifted to £3,000 for a typical household, reducing the amount the Treasury pays in subsidies. The Energy Bills Support Scheme, which gives households £400 off their bills, is also due to end in March.
Ben Gallizzi of uSwitch says that even if there is a reduction in wholesale costs, it will not have an immediate effect. “It would probably take some time until that is passed on to consumer bills,” he says.
Reining in rises
After a decade during which rates were in the doldrums, savers took some solace in rising interest rates last year – even if they never came close to tracking inflation.
Easy-access rates are now at their highest since 2009, at an average of 1.43%, while the average one-year fixed-rate savings bond is paying 3.51%, the best available since 2008. Anyone willing to put their money away for longer can get an average of 3.89%, according to figures from financial data company Moneyfacts.
The new year should see strong competition between lenders as they seek to attract business in a market where activity has droppedDavid Hollingworth, mortgage broker
The rises come as a result of a series of increases in the base rate by the Bank of England, and also because of competition from challenger banks, says Rachel Springall at Moneyfacts.
However, the last few months have seen a slowdown in increases, which could mean the peaks have been shortlived.
“The month-on-month rises between the average fixed bond and fixed Isa rates, between the start of November and December, were more subdued compared to the month prior, demonstrating a more muted attitude among providers repricing their deals,” says Springall.
This may see rates move in the opposite direction as we begin the year, as banks, building societies and other providers reassess their market positions during an unprecedented period of interest rate uncertainty, she adds. “If providers cut back their rates, it can lead to other brands being more exposed on the top-rate tables, leading to further cuts.”
Moneyfacts reckons savers and providers alike will need to act quickly to keep on top of the changing market.
The effects of September’s mini-budget were catastrophic for anyone coming to the end of their fixed-rate mortgage and looking to take out a new fixed deal. Although rates were already climbing, the fallout brought them to 6% and above.
The picture is not so grim for the coming year, though it is by no means a return to the low rates that we have seen in recent years. David Hollingworth, at broker L&C Mortgages, says five-year deals can now be picked up at about 4.5%.
“The new year should see strong competition between lenders as they seek to attract business in a market where activity has dropped in recent months. That should be good news for borrowers, as increased competition will help drive rates down, improving the range of options,” he says.
The Bank of England’s decision last month to raise rates for the ninth time in a year, to the highest level in 14 years, is not expected to be the end of the hikes. Some forecasts suggest they could rise to 4.5% by the end of the year.
The state pension, and benefits such as universal credit and pension credit, will increase by 10.1% in April, in line with recent inflation figures.
For those who reached pension age after April 2016, this will mean a payment of up to £203.85 a week, up from £185.15. Those who reached pension age before that will get £156.20 a week, up from £141.85.
Pensions campaigner and former minister Ros Altmann says she expects investment returns to improve this year as the threat around inflation recedes. “There needs to be an improvement in the way pensions are explained to customers, so that people can take more interest in their money and see how it is doing,” she says.