29th  March 2023

Household budgets are set to come under more financial pressure from a litany of heightened costs ranging from council tax, energy, broadband and mobile bills, while rampant inflation and a higher tax burden erode the value of our earnings.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “It is shaping up to be yet another awful April for personal finances, with price rises seemingly coming from all directions. This is compounded by stubbornly rampant inflation which unexpectedly ticked higher in February - propped up by price rises in essential areas of expenditure like food. Meanwhile, the deep freeze in the personal allowance and tax thresholds means we will all be paying more in tax overtime as earnings grow. It is a perfect storm that threatens to knock finely tuned budgets off-kilter.

“There is no escape from rising prices, so tackle them head on. It remains important to pay extra attention to your financial wellbeing and consider what protective steps you can take now to avoid money worries later. If you don’t have a budget, now is a good time to start one – categorising outgoings and income as well as getting an idea of you personalised inflation number and how a prolonged high inflation environment might impact you. If you are struggling to stay financial afloat, make sure you’re getting all the support you’re entitled to.”

Myron Jobson outlines some of the biggest changes in personal finance in the new tax year and what you can do to lower the cost burden.

Personal taxes

It is no secret that public finances aren’t in the best of shape following the government’s colossal spend on Covid and latterly cost-of-living support measures.

Instead of changing the income tax rates, the government has chosen not to raise the personal allowance and tax thresholds in line with earnings or inflation. This means we’ll all pay more in tax - but in a less obvious way. It creates a situation where workers pay more taxes and have less purchasing power - even when earning more.

The latest bumper tax haul, up £65 billion year-on-year between April 2022 and January 2023 at £660 billion, shows that the deep freeze to tax thresholds and allowances until 2028 is a money spinner for the government and well help balance the books.

Assuming that wages rise in line with OBR forecast until 2024 and then 2% thereafter, our calculations show the average worker earning £30,000 a year could pay 14% more in tax in the new tax year with pay rising by 10%. By the end of the 2027/28 tax year, this cohort could pay a third more in tax with a 21% increase in their wage.

For someone earning £50,000, their tax burden to rise by 15%, with pay increasing by 10% in the new tax year. This could increase to 35% by the end of the 2027/28 tax year with a 21% wage increase.  

The tax burden is even greater for those earning £20,000 – they could pay 25% more in tax with pay increasing by 10% in the new financial year. Their tax burden could double by the end of the 2027/28 tax year with a 21% wage increase.

How to pay less: For most of us, we’ll have to grit our teeth and bear the heightened tax burden. But the freezing of income tax threshold and other personal allowances has bolstered the allure of paying into a workplace pension through salary sacrifice - for those who can afford to. This arrangement allows employers to reduce employees’ salary and pay the equivalent amount as pension contributions. Basic-rate taxpayers get 20% pension tax relief, turning a £80 contribution to £100. If you are a higher-rate taxpayer, you could reclaim an additional 20% tax on your pension contributions, for a total of 40% tax relief.

Think of a pension as deferred income and this seems like a good way to reduce your overall NI bill without reducing your income, if you are happy to take it after age 55 instead.

Energy bills

Households are facing a £67 a month rise in energy bills from next month with the £400 winter discount under the Energy Support scheme coming to an end this Friday (31 March). This is despite the extension to the Energy Price Guarantee at its current rate until the summer, which limits a typical household energy bill to £2,500 a year. Energy bills are forecast to fall below £2,000 a year by the summer.

With many already struggling to afford energy bills as it, the increase threatens to land billpayers in financial hot water as the majority of energy bills direct debits are based on an estimated usage over the next 12 month split into monthly payments. Finding an extra £67 won’t come easy for those who’ve already cut their budget to the bare bones.

How to pay less: There are a number of practical ways in which you can cut your energy usage such reducing your room thermostat, changing lights to energy efficient bulbs, turning appliances off standby, draught proofing, and washing laundry at a lower temperature. While cost savings are modest individually, they can be significant combined.

If you are struggling to pay your energy bills, contact your energy supplier to ask for support as your first port of call. Your supplier is obliged to help you come to a solution, such as a payment plan that considers how much you can afford to pay.

Financial support is also available to the most vulnerable billpayers. Around eight million means-tested benefits claimants including people on Universal Credit, Pension Credit and tax credits will £900 over the next tax year. Vulnerable households could also secure a grant through the government’s household Support Fund which is distribution through local councils. There are a host of other energy support schemes. It is worth consulting a debt advice charity such as StepChange or Turn2Us and they will go through all of your options.

Council tax

Last year, the government increased the amount councils in England are allowed to put up council tax without having to hold a local referendum. Those with social care duties can raise council tax by 5%, while others can put it up by 3%.

The County Councils Network found three-quarters of English councils with social care duties that have published budget details are planning a 5% hike, meaning millions of households a set to be hit by the top percentage increase. This means the typical Band D council tax bill for residents in England will rise by £98 from £1,966 a year to £2,064 in the new tax year.

How to pay less: Unlike some other bills, you can’t haggle down or switch to a better deal when it comes to council tax, but you might be able to pay less council tax or not pay it at all depending on your circumstances. For example, if you're the only adult in your home, you’ll get a 25% discount on your council tax bill, while those on low income could be entitled to some help towards paying their council tax in the form of a Council Tax Reduction.

Broadband and mobile tariffs

Every April, many broadband and mobile firms raise their prices in line with inflation (be it CPI or RPI) plus up to 4%. The abnormally high inflation levels in 2022 resulted in some existing customers facing price increases of over 10%. Ofcom research shows that about a third of UK households (over 9 million in total) were struggling to afford their communications services in October 2022.

How much your bill will go up by, and on what date, depends on your current deal.

How to pay less: You won’t know whether you are paying over the odds for things unless you shop around for the best deals. For example, if you've been with a broadband provider for a while, it is likely that any introductory offers will have expired, and you might be paying more than you need to. The same goes for mobile phone contracts. Shop around to see if you can get a better deal.

Buying bundled instead of standalone services could work out cheaper. Ofcom’s analysis of typical ‘baskets’ of communications services bought by households shows that those with a fixed broadband connection could save between 9% and 39% when they purchase bundled services. The exceptions are those that only need landline and mobile phone services; this is because they are buying a service they do not require (fixed broadband) and cannot access low-cost line rental pricing. The exceptions are those that only need landline and mobile phone services; this is because they are buying a service they do not require (fixed broadband) and cannot access low-cost line rental pricing.

Water bills

Water bills are set to get the biggest increase in almost 20 years from April, with the annual bill for an average household in England and Wales set to rise by £31 to £448 a year, or an increase of 7.5 per cent, according to industry body Water UK.

How to pay less: You can’t switch water providers, there are a few practical steps you can take to save on costs. If your household water usage is low, it could be worth getting a water meter installed – so you’d pay for the water you use instead of a set price per year based on the rateable value of your property (including the property’s size).

Cutting back on the amount of water you use is the simplest way to reduce your bills. Household could also get free gadgets to help save water. If you're having trouble paying your water bill, contact your water company to see what help it can offer.

Dividend and capital gains tax allowances cut

The dividend allowance is being slashed from £2,000 to £1,000 from 6 April, while the capital gains tax annual exemption is more than halving, going from £12,300 to £6,000 in April 2023 and £3,000 from April 2024.

Our calculations show a higher rate taxpayer earning £2,000 dividend income per year will be liable to pay dividend tax of £338 from 6 April 2023, rising to £506 from April 2024 when the dividend allowance is cut again. A basic rate taxpayer would face a tax bill of £88 from the new tax year and £131 from April 2024. Those scenarios are based on a £50,000 portfolio yielding 4% (shares in the FTSE 100 pay an average of around 4% dividend income).

A higher rate taxpayer earning £5,000 in dividend per year would owe £1,013 in tax at present, rising to £1,350 from April and then £1,519 from April 2024. For basic rate taxpayers, the amount owed in tax will increase from £263 to £350 in April and £394 from April 2024. Those scenarios are based on a £125,000 portfolio yielding 4%.

When it comes to CGT, the fall in tax-free allowance means a higher rate taxpayer making a gain of £10,000 will be required to pay tax to the tune of £800 CGT after April, or £1,400 if they sell their shares after April 2024. For a basic rate taxpayer, the figures are £400 from April and £700 from April 2024.

A higher rate taxpayer making a gain of £20,000 would owe £1,540 in tax at present, rising to £2,800 from April and then £3,400 from April 2024. For basic rate taxpayers, the amount owed in tax will increase from £770 to £1,400 in April and £1,700 from April 2024.

How to pay less: The shrinking allowances could provide the impetus for investors to invest through a tax efficient wrapper if they haven’t already done so. Shifting investments into an ISA protects future gains and dividends from tax. Known as Bed & ISA, the process is a valuable tool as a part of a broader portfolio spring clean strategy. The transfer, however, will involve selling and buying back shares, which could trigger a CGT bill.

While ii charge commissions on the repurchase of investments into an ISA, and stamp duty may be applicable, Bed & ISA is tried and tested route to wrapping existing investments to generate the long-term benefits of a tax-efficient Isa – which over the long term is likely to outweigh the charges that might apply.”

Bed & Sipp works in a similar way, letting you top up your pension by using your existing investments as SIPP contributions - but bear in mind withdrawals that exceed the 25% tax-free allowance will be taxed as income.

BONUS: investing can be worthwhile – if you can afford to do so

Investing your money can prove worthwhile if you can afford to keep your cash wrapped up in investments for at least five years (ideally). You don’t need huge amount start (as little as £25 a month). While past performance is not an indicator of future results, history has shown that investing can yield inflation-beating returns that can trump cash savings over the long term.