The first week of February was not a good one for our personal finances. As everyone reading this will be aware, the energy price cap was raised, and headlines warned that British households face a record £693 price hike.
This came on top of the confirmation from the Chancellor that April’s planned increase in national insurance – for both employers and employees – will go ahead. Andrew Bailey, Governor of the Bank of England, warned that the rising cost of living and squeeze on living standards may not ease until next year.
…And then there was inflation. In December, the inflation rate in the UK increased to 5.4%, up from 5.1% in November and the highest figure recorded since March 1992 – almost 30 years ago. In response to this, the Bank of England increased interest rates to 0.5% with, according to reports, four members of the Monetary Policy Committee pushing for an immediate increase to 0.75%.
The Bank currently sees inflation peaking at 7.25%, so more interest rate rises are likely, which will almost certainly be reflected in higher mortgage rates. Many of our older readers will remember inflation rates like this, and they may also remember mortgage rates of 15%. But for Millennials and Generation Z, it is going to be the first time they’ve faced these inflationary pressures, which will apply whether they are renting or buying their own home.
Many households will also be put under further pressure by changes in income tax personal allowances and the higher rate threshold. In the Budget of 2021, Chancellor Rishi Sunak announced that these would be frozen for four years until the tax year 2025/26. He defended the move as “a fair way to help solve the problems we need to solve”.
What it means in practice is that as wages rise, and with a shortage of potential employees, there is real pressure on wages. More people will be drawn into paying income tax (at £12,570) and paying higher rate tax on their earnings, with the higher rate threshold at £50,270.
So more tax to pay, energy costs going up, inflation and national insurance: it is impossible to disagree with the Governor of the Bank of England. And yet we still need to save for our retirement, we still need to make sure the mortgage rate we are paying is competitive, and we still need to have the necessary protection policies in place.
In short, financial planning has never been more important than it is now, whether you are placing your first foot on the property ladder or counting the days to your retirement. If you or any member of your family has any questions at all, please don’t hesitate to get in touch with us. As so many of our clients will testify, a small amount of effective, efficient financial planning can make a very big difference.
